Measuring the Effects of Monetary Policy Using Market Expectations

In order to quantify the effects of monetary policy, this paper employs an alternative empirical measure of monetary policy shocks based on market expectations obtained from media and survey information in Peru. Using monthly data for the period 2003-2011, we use the proposed measure as a variable representing exogenous variation in monetary policy and evaluate its dynamic impact on output and prices. The results show a coherent picture of the effects of monetary policy compared to alternative approaches in terms of both the magnitude and the timing of the effects.Monetary policy shocks, media, survey

An Empirical Analysis of the Credit-Output Relationship: Evidence from Peru

This paper investigates the empirical relationship between credit and output in Peru. The analysis is based on the estimation of vector error correction models and the identification of structural shocks. The models considered include real output, real credit growth (in domestic currency, foreign currency and both), and terms of trade. Using quarterly data for the period 1994-2011, the results suggest that real credit growth contain useful information to understand the evolution of the non-deterministic component of real output. In particular, the results show that: (i) there exist a stable long-run relationship between real credit growth, output and terms of trade, (ii) real credit growth is useful in forecasting output in the long-run, and (iii) a structural permanent shock in real credit has positive permanent effects on output. Therefore, credit aggregates could be useful as indicator variables for policymakers.Credit growth, output growth, vector error correction models, structural shocks.

Monetary aggregates and monetary policy: an empirical assessment for Peru

In recent years the theoretical and empirical literature has shown a tendency to discard the use of money in monetary policy. This paper provides an empirical evaluation of the relevance of monetary aggregates in the conduct of monetary policy in Peru, a small open and partially dollarized economy. Based on recursive analysis of vector error correction models and allowing for structural breaks, we find that M3 is the only monetary aggregate that helps forecast inflation in Peru and therefore can be useful in monetary policy. There is no clear evidence about the usefulness of any other narrower monetary aggregate either as a potential monetary policy instrument or as an information variable.cointegration, dollarization, Granger causality, monetary aggregates, monetary policy, structural change, weak and strong exogeneity

The Effects Of Monetary Policy Shocks In Peru: Semi-Structural Identification Using A Factor-Augmented Vector Autoregressive Model

The main goal of this paper is to analyze the effects of monetary policy shocks in Peru, taking into account two important issues that have been addressed separately in the VAR literature. The first one is the difficulty to identify the most appropriate indicator of monetary policy stance, which is usually assumed rather than determined from an estimated model. The second one is the fact that monetary policy decisions are based on the analysis of a wide range of economic and financial data, which is at odds with the small number of variables specified in most VAR models. To overcome the first issue, Bernanke and Mihov (1998) proposed a semi-structural VAR model from which the indicator of monetary policy stance can be derived rather than assumed. Meanwhile, the data problem has been resolved recently by Bernanke, Boivin and Eliasz (2005) using a Factor-Augmented Vector Autoregressive (FAVAR) model. In order to capture these two issues simultaneously, we propose an extension of the FAVAR model that incorporates a semi-structural identification approach a la Bernanke and Mihov, resulting in a VAR model that we denominate SS-FAVAR. Using data for Peru, the results show that the SS-FAVAR's impulse-response functions (IRFs) provide a more coherent picture of the effects of monetary policy shocks compared to the IRFs of alternative VAR models. Furthermore, it is found that innovations to nonborrowed reserves can be identified as monetary policy shocks for the period 1995-2003.VAR, FAVAR, Monetary Policy, Semi-Structural Identification.

Evaluation of Wavelet-based Core Inflation Measures: Evidence from Peru

Under inflation targeting and other related monetary policy regimes, the identication of non-transitory inflation and forecasts about future inflation constitute key ingredients for monetary policy decisions. In practice, central banks perform these tasks using so-called "core inflation measures". In this paper we construct alternative core inflation measures using wavelet functions and multiresolution analysis (MRA), and then evaluate their relevance for monetary policy. The construction of wavelet-based core inflation measures (WIMs) is relatively new in the literature and their assessment has not been addressed formally, this paper being the first attempt to perform both tasks for the case of Peru. Another main contribution of this paper is that it proposes two alternative criteria for evaluating core inflation measures: (i) a VAR-based long-run criterion, and (ii) forecast-based criteria. Evidence from Peru shows that WIMs are superior in terms of long-run performance, and that they could improve short-term (up-to-6-months) inflation forecasts.Core inflation, wavelets, forecast, structural VAR

About the role of monetary aggregates for monetary policy: the case of Peru

The purpose of this paper is to analyze the relevance of monetary aggregates for monetary policy as indicators of real activity. The main hypothesis of this paper is that narrow monetary aggregates can help forecasting real output. The empirical analysis combines the time scale decomposition of time series using wavelets and the possible existence of cointegrating relationships between money, output and prices. Using recent Peruvian data, evidence is found to support the proposed hypothesis. In particular, the results suggest the existence of co-integration between non-stationary series built using wavelet filtering. In this context, exogeneity tests reveal that narrow monetary aggregates are weakly and strongly exogenous; i.e., they are helpful for forecasting real output. These results suggest that money has a role for monetary policy as an indicador of real activity.

Wavelet-based Core Inflation Measures: Evidence from Peru

Under inflation targeting and other related monetary policy regimes, the identification of non-transitory in ation and forecasts about future inflation constitute key ingredients for monetary policy decisions. In practice, central banks perform these tasks using so-called "core inflation measures". In this paper we construct alternative core inflation measures using wavelet functions and multiresolution analysis (MRA), and then evaluate their relevance for monetary policy. The construction of wavelet-based core inflation measures (WIMs) is relatively new in the literature and their assessment has not been addressed formally, this paper being the first attempt to perform both tasks for the case of Peru. Another main contribution of this paper is that it proposes a VAR-based long-run criterion as an alternative criteria for evaluating core inflation measures. Evidence from Peru shows that WIMs are superior to official core inflation in terms of both the proposed criterion and forecast-based criteria.Core infl ation, wavelets, forecast, structural VAR

La relación dinero-producto, brecha del producto e inflación subyacente: algunas aplicaciones de las funciones Wavelets

En el presente trabajo se propone el uso de funciones wavelets y el análisis multiresolución como enfoques alternativos al estudio de tres áreas de interés de la economía peruana: la causalidad entre dinero y producto, la medición de la brecha del producto y de la inflación subyacente. Una wavelet es una función matemática conocida desde inicios de siglo XX cuyo uso se orientó inicialmente a la resolución de problemas de ingeniería; sin embargo, su estudio se formalizó como teoría matemática recién a mediados de los años ochenta. Para el caso de la economía, las wavelets pueden ser utilizadas en la localización de fenómenos específicos a un tiempo (escala) y frecuencia particulares, lo que permite su aplicación al análisis de series de tiempo no estacionarias. Por su parte, el análisis multiresolución permite obtener aproximaciones sucesivas de una serie de tiempo basadas en funciones wavelets, de esta forma, cada aproximación contiene información asociada a diferentes escalas u horizontes temporal. Mediante esta corriente de análisis se obtienen resultados que complementan a los hallados con los métodos tradicionales. Así, se encuentra evidencia que sustenta la hipótesis de que el dinero causa (en el sentido de Granger) al producto; en particular, los resultados muestran que la relación de causalidad entre dinero y producto no es única, sino que depende de la escala temporal analizada. También se obtienen indicadores de producto potencial y de inflación subyacente que son consistentes con consideraciones teóricas y hechos estilizados observados en la economía peruana.

Monetary aggregates and monetary policy in Peru

This paper investigates empirically the usefulness of monetary aggregates as information variables in the conduct of monetary policy. For this purpose, some recent advances on the topic were used, which include the analysis of both real-time and revised final data, and the application of Bayesian model averaging to allow for model uncertainty regarding the lag length and number of cointegrating relationships. In this paper, money is considered as an information variable for Wt (e.g. output or prices) if the following two criteria are satisfied: (i) Mt is strongly exogenous, and (ii) Mt Granger-causes Wt. Strong exogeneity is relevant because it validates conditional forecasting of Wt using monetary aggregates as conditioning variables. The results show no strong evidence supporting the usefulness of monetary aggregates as information variables for prices or output. However, this does not preclude their potential use as information variables for other macroeconomic targets such as financial stability