Measuring External Risks for Peru: Insights from a Macroeconomic Model for a Small Open and Partially Dollarized Economy

Author/Editor:

Fei Han

Publication Date:

September 2, 2014

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper quantifies the effects of external risks for Peru, with particular attention to two major external risks, China’s investment slowdown and the U.S. monetary policy tightening. In particular, a macroeconomic model for a small open and partially dollarized economy is developed and estimated for Peru to measure the risk spillovers, and simulate domestic macroeconomic responses in different scenarios with these two external risks. The simulation results suggest that Peru’s output is vulnerable to both risks, particularly the U.S. monetary policy tightening. Simulations also highlight the importance of higher exchange rate flexiblity and a lower degree of dollarization, which could help mitigate the negative spillover effects of these external risks.

Series:

Working Paper No. 2014/161

Subject:

English

Publication Date:

September 2, 2014

ISBN/ISSN:

9781498327220/1018-5941

Stock No:

WPIEA2014161

Pages:

24

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