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Item type:Publication, Inflation, oil price volatility and monetary policy(Elsevier, 2020-12-01)In a fully micro-founded New Keynesian framework, we characterize an analytical relationship between average inflation and oil price volatility by solving the rational expectations equilibrium of the model up to second order of accuracy. The model shows that higher oil price volatility induces higher levels of average inflation. We also show that when oil has low substitutability in the production function, the higher the weight the central bank assigns to inflation in the policy rule, the lower the level of average inflation is. The analytical solution further indicates that, for a given level of oil price volatility, average inflation is higher when marginal costs are convex in oil prices, the Phillips Curve is convex, and the degree of relative price dispersion is higher. The evolution of inflation during the 70s and 80s is consistent with the prediction of the model. - Some of the metrics are blocked by yourconsent settings
Item type:Publication, Evolution of monetary policy in Peru: an empirical application using a mixture innovation TVP-VAR-SV model(Oxford University Press, 2021-12-15)This article discusses the evolution of monetary policy (MP) in Peru in 1996Q1–2019Q4 using a mixture innovation time-varying parameter vector autoregressive (VAR) model with stochastic volatility (TVP-VAR-SV) as proposed by Koop, Leon-Gonzales and Strachan. The main empirical results are: (i) the VAR coefficients and volatilities change more gradually than the contemporaneous coefficients over time; (ii) the volatility of MP shocks was higher under the pre-Inflation Targeting (IT) regime; (iii) a surprise increase in the interest rate produces gross domestic product (GDP) growth falls and reduces inflation in the long run; (iv) the interest rate reacts more quickly to aggregate supply shocks than to aggregate demand shocks; (v) MP shocks explain a high percentage of domestic variables behavior under the pre-IT regime but their contribution decreases under the IT regime. Overall, these results show that MP has contributed in Peru to lower macroeconomic volatility by (i) reducing average long-term inflation, (ii) increasing the response of GDP growth rate to interest rate, and (iii) by becoming more predictable. (JEL codes: C11, C32, and E52).