Measuring External Risks for Peru: Insights from a Macroeconomic Model for a Small Open and Partially Dollarized Economy
September 2, 2014
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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.
Subject: Exchange rate flexibility, Exchange rates, Foreign exchange, Inflation, Metal prices, Output gap, Prices, Production
Keywords: China scenario, copper export, exchange rate, Exchange rate flexibility, Exchange rates, External Risk, federal funds rate, Global, Inflation, interest rate, investment slowdown, Macroeconomic Forecast, Macroeconomic Model, macroeconomic response, Metal prices, mineral imports, monetary policy, Output gap, Partial Dollarization, Peru's output gap, Spillovers, terms-of-trade gap, U.S. dollar, World metal price inflation, WP
Pages:
24
Volume:
2014
DOI:
Issue:
161
Series:
Working Paper No. 2014/161
Stock No:
WPIEA2014161
ISBN:
9781498327220
ISSN:
1018-5941
