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External Shocks and Economic Fluctuations in Peru: Empirical Evidence using Mixture Innovation TVP-VAR-SV Models

Author

Listed:
  • Brenda Guevara

    (Pontificia Universidad Católica del Perú.)

  • Gabriel Rodríguez

    (Departamento de Economía de la Pontificia Universidad Católica del Perú.)

  • Lorena Yamuca Salvatierra

    (Pontificia Universidad Católica del Perú.)

Abstract

We employ a family of mixture innovation, time-varying parameter VAR models with stochastic volatility (TVP-VAR-SV) to analyze the impact of external shocks on Peru’s GDP growth, inflation, and interest rate from 1998Q1 to 2019Q4. Our key findings are as follows: (i) the model best fitting the data features time-varying parameters and variances with a certain likelihood; (ii) impulse-response functions reveal that a 1% increase in the growth rate of Peru’s major trading partners (China and the U.S.) leads to a domestic GDP growth expansion of 0.65% and 0.21%, respectively; (iii) the forecast error variance decomposition shows that external shocks account for 65% of the long-term variability in output, 65% in inflation, and 67% in the interest rate; (iv) historical decomposition indicates that external shocks account for 50% of domestic GDP growth, particularly from 2002 onward. Lastly, we validate the results obtained in the primary specification through four robustness exercises. JEL Classification-JE: C32, C52, E31, F41.

Suggested Citation

  • Brenda Guevara & Gabriel Rodríguez & Lorena Yamuca Salvatierra, 2024. "External Shocks and Economic Fluctuations in Peru: Empirical Evidence using Mixture Innovation TVP-VAR-SV Models," Documentos de Trabajo / Working Papers 2024-529, Departamento de Economía - Pontificia Universidad Católica del Perú.
    • Handle: RePEc:pcp:pucwps:wp00529
    DOI: 10.18800/2079-8474.0529
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    More about this item

    Keywords

    External Shocks; Macroeconomic Fluctuations; Time-Varying Parameter Vector Autoregressive Models; Stochastic Volatility; Mixture in Innovations; Peru.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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