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Regime-Switching, Stochastic Volatility and Impacts of Monetary Policy Shocks on Macroeconomic Fluctuations in Peru

Author

Listed:
  • Gabriel Rodriguez

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

  • Paola Alvarado Silva

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

  • Moisés Cáceres Quispe

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

Abstract

This paper utilizes regime-switching VAR models with stochastic volatility (RS-VAR-SV) to analyze the impact and evolution of monetary policy shocks and their contribution to the dynamics of GDP growth, inflation, and the interest rate in Peru for the period from 1994Q3 to 2019Q4. The main findings are: (i) the best-fifting models incorporate only SV; (ii) there are two distinct regimes coinciding with the implementation of the inflation targeting (IT) scheme; (iii) the volatility of GDP growth and inflation began to decrease in the early 1990s, while interest rate volatility declined following IT implementation; and (iv) pre-IT, monetary policy shocks accounted for 15%, 30%, and 90% of the forecast error variance decomposition for in ation, GDP growth, and the interest rate in the long term, respectively. Following IT adoption, monetary policy ceased to be a source of uncertainty for the economy. These results are robust to changes in priors, domestic and external variables,the number of regimes, and the ordering and number of variables of the model. Palabras claves: Regime-Switching VAR, Stochastic Volatility, Marginal Likelihood, Bayesian Models, Monetary Policy, Peru. JEL Classification-JE: C11, C32, C52, E51, E52

Suggested Citation

  • Gabriel Rodriguez & Paola Alvarado Silva & Moisés Cáceres Quispe, 2024. "Regime-Switching, Stochastic Volatility and Impacts of Monetary Policy Shocks on Macroeconomic Fluctuations in Peru," Documentos de Trabajo / Working Papers 2024-537, Departamento de Economía - Pontificia Universidad Católica del Perú.
    • Handle: RePEc:pcp:pucwps:wp00537
    DOI: 10.18800/2079-8474.0537
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    Keywords

    Regime-Switching VAR; Stochastic Volatility; Marginal Likelihood; Bayesian Models; Monetary Policy; Peru.;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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