IDEAS home Printed from https://ideas.repec.org/a/eee/ecofin/v68y2023ics1062940823000888.html
   My bibliography  Save this article

Does the Central Bank of Peru respond to exchange rate movements? A Bayesian estimation of a New Keynesian DSGE model with FX interventions

Author

Listed:
  • Rodríguez, Gabriel
  • Castillo B., Paul
  • Hasegawa, Harumi

Abstract

This paper assesses the role played by the exchange rate and FX intervention in setting monetary policy interest rates in Peru. We estimate a Taylor rule that includes inflation, output gap and the exchange rate using a New Keynesian DSGE model that follows closely Schmitt-Grohé and Uribe (2017). The model is extended to include an explicit sterilized FX intervention rule as in Faltermeier, Lama, and Medina (2017). The main empirical results show that the model that features a Taylor rule which does not respond to changes in the nominal exchange rate and considers an active use of FX interventions by the Central Bank of Peru clearly outperforms other model specifications in terms of the marginal log density. We also find that the coefficient associated with the response of the Taylor rule to inflation is close to 2 and the one associated with the output gap is greater than 1. Additionally, we find that FX interventions have become more responsive to exchange rate fluctuations during the IT period. Finally, the estimated IRFs show that FX interventions has contributed to reducing the volatility of GDP in response to productivity and terms of trade shocks in Peru.

Suggested Citation

  • Rodríguez, Gabriel & Castillo B., Paul & Hasegawa, Harumi, 2023. "Does the Central Bank of Peru respond to exchange rate movements? A Bayesian estimation of a New Keynesian DSGE model with FX interventions," The North American Journal of Economics and Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823000888
    DOI: 10.1016/j.najef.2023.101965
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062940823000888
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.najef.2023.101965?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    2. Batini, Nicoletta & Gabriel, Vasco & Levine, Paul, 2010. "A Floating versus managed exchange rate regime in a DSGE model of India," Working Papers 10/70, National Institute of Public Finance and Policy.
    3. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
    4. Moron, Eduardo & Winkelried, Diego, 2005. "Monetary policy rules for financially vulnerable economies," Journal of Development Economics, Elsevier, vol. 76(1), pages 23-51, February.
    5. Laurence Ball, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    6. Castillo, Paul & Medina, Juan Pablo, 2021. "Foreign Exchange Intervention, Capital Flows, and Liability Dollarization," Working Papers 2021-006, Banco Central de Reserva del Perú.
    7. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, May.
    8. Castillo, Paul & Rojas, Youel, 2014. "Terms of Trade and Total Factor Productivity: Empirical evidence from Latin American emerging markets," Working Papers 2014-012, Banco Central de Reserva del Perú.
    9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    10. Iskrev, Nikolay, 2010. "Local identification in DSGE models," Journal of Monetary Economics, Elsevier, vol. 57(2), pages 189-202, March.
    11. Duarte, Margarida & Stockman, Alan C., 2005. "Rational speculation and exchange rates," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 3-29, January.
    12. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    13. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
    14. Carrasco, Alex & Florián Hoyle, David, 2020. "External shocks and FX intervention policy in emerging economies," Working Papers 2020-015, Banco Central de Reserva del Perú.
    15. Llosa, Luis-Gonzalo, 2013. "How Do Terms of Trade Affect Productivity? The Role of Monopolistic Output Markets," Working Papers 2013-007, Banco Central de Reserva del Perú.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Flavio Pérez Rojo & Gabriel Rodríguez, 2023. "Jane Haldimand Marcet: Impact of Monetary Policy Shocks in the Peruvian Economy Over Time," Documentos de Trabajo / Working Papers 2023-523, Departamento de Economía - Pontificia Universidad Católica del Perú.
    2. Donato Masciandaro, 2023. "How Elastic and Predictable Money Should Be: Flexible Monetary Policy Rules from the Great Moderation to the New Normal Times (1993-2023)," BAFFI CAREFIN Working Papers 23196, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    3. Yugang He & Zhuoqi Teng, 2024. "Navigating Uncharted Waters: The Transformation of the Bank of Korea’s Monetary Policy in Response to Global Economic Uncertainty," Mathematics, MDPI, vol. 12(11), pages 1-24, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Ratto, Marco, 2019. "Identification versus misspecification in New Keynesian monetary policy models," European Economic Review, Elsevier, vol. 113(C), pages 225-246.
    2. Adolfson, Malin & Lindé, Jesper, 2011. "Parameter Identification in a Estimated New Keynesian Open Economy Model," Working Paper Series 251, Sveriges Riksbank (Central Bank of Sweden).
    3. Wieland, Volker & Cwik, Tobias & Müller, Gernot J. & Schmidt, Sebastian & Wolters, Maik, 2012. "A new comparative approach to macroeconomic modeling and policy analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 523-541.
    4. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2008. "Evaluating an estimated new Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2690-2721, August.
    5. García, Carlos J. & González, Wildo D., 2013. "Exchange rate intervention in small open economies: The role of risk premium and commodity price shocks," International Review of Economics & Finance, Elsevier, vol. 25(C), pages 424-447.
    6. Carlos Garcia & Wildo Gonzalez, 2014. "Why does monetary policy respond to the real exchange rate in small open economies? A Bayesian perspective," Empirical Economics, Springer, vol. 46(3), pages 789-825, May.
    7. Carlos Garcia & Wildo Gonzalez, 2010. "Is more exchange rate intervention necessary in small open economies? The role of risk premium and commodity shocks," ILADES-UAH Working Papers inv248, Universidad Alberto Hurtado/School of Economics and Business.
    8. Carlos Garcia & Wildo Gonzalez, 2009. "Rationale behind the responses of monetary policy to the real exchange rate in small open economies," ILADES-UAH Working Papers inv228, Universidad Alberto Hurtado/School of Economics and Business.
    9. Tatiana Kirsanova & Stephanus le Roux, 2013. "Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 99-152, December.
    10. Camba-Mendez, Gonzalo & Rodriguez-Palenzuela, Diego, 2003. "Assessment criteria for output gap estimates," Economic Modelling, Elsevier, vol. 20(3), pages 529-562, May.
    11. Lindé, Jesper & Smets, Frank & Wouters, Rafael, 2016. "Challenges for Central Banks´ Macro Models," Working Paper Series 323, Sveriges Riksbank (Central Bank of Sweden).
    12. Glenn D. Rudebusch, 2002. "Assessing Nominal Income Rules for Monetary Policy with Model and Data Uncertainty," Economic Journal, Royal Economic Society, vol. 112(479), pages 402-432, April.
    13. Ali Dib & Mohamed Gammoudi & Kevin Moran, 2008. "Forecasting Canadian time series with the New Keynesian model," Canadian Journal of Economics, Canadian Economics Association, vol. 41(1), pages 138-165, February.
    14. Éric Jondeau & Hervé Le Bihan, 2002. "Evaluating Monetary Policy Rules in Estimated Forward-Looking Models: A Comparison of US and German Monetary Policies," Annals of Economics and Statistics, GENES, issue 67-68, pages 357-388.
    15. Galí, Jordi, 2002. "New Perspectives on Monetary Policy, Inflation and the Business Cycle," CEPR Discussion Papers 3210, C.E.P.R. Discussion Papers.
    16. Inoue, Atsushi & Kuo, Chun-Hung & Rossi, Barbara, 2020. "Identifying the sources of model misspecification," Journal of Monetary Economics, Elsevier, vol. 110(C), pages 1-18.
    17. Chen, Xiaoshan & Kirsanova, Tatiana & Leith, Campbell, 2014. "An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area," SIRE Discussion Papers 2015-04, Scottish Institute for Research in Economics (SIRE).
    18. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    19. Danny Hermawan & Denny Lie & Aryo Sasongko & Richard I. Yusan, 2023. "Money velocity, digital currency, and inflation dynamics," Working Papers 2023-01, University of Sydney, School of Economics.
    20. Han, Bing & Hirshleifer, David & Wang, Tracy Yue, 2005. "Investor Overconfidence and the Forward Discount Puzzle," Working Paper Series 2005-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.

    More about this item

    Keywords

    Small open economy; Taylor rule; Monetary policy rule; Exchange rate; Bayesian methodology; Peruvian economy; FX interventions; New Keynesian DSGE model;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecofin:v:68:y:2023:i:c:s1062940823000888. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620163 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.