Evolution of Monetary Policy in Peru: An Empirical Application Using a Mixture Innovation TVP-VAR-SV Model

Abstract This article discusses the evolution of monetary policy (MP) in Peru 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) VAR coefficients volatilities change more gradually than contemporaneous over time; (ii) MP shocks was higher under pre-Inflation Targeting (IT) regime; (iii) surprise increase interest rate produces gross domestic product (GDP) growth falls reduces inflation long run; (iv) reacts quickly to aggregate supply demand shocks; (v) explain high percentage variables behavior pre-IT regime but their contribution decreases IT regime. Overall, these show that has contributed lower macroeconomic reducing average long-term inflation, increasing response GDP rate, becoming predictable. (JEL codes: C11, C32, E52).