Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)

This paper evaluates the link between inflation and inflation uncertainty in a context of monetary policy regime shifts for the Peruvian economy. We use a model of unobserved components subject to regime shifts to evaluate this link. We verify that periods of high(low) inflation me an were accompanied by periods of high(low) both short -and long- run uncertainty in inflation. Interestingly, unlike developed countries, short run uncertainty is important. These relationaships are consistent with the presence of three clearly differentiated regimes. First, a period of price stability, then a high -inflation high-volatility regime, and finally a hyperinflation period. We also verify that during a recent period of price stability, both permanent and transitory shocks to inflation have decreased in volatility. Finally, we find evidence that inflation and money growth rates share similar regime shifts.