Preferences of the Central Reserve Bank of Peru and optimal monetary rules in the inflation targeting regime

Abstract

This study aims to identify the preferences of the monetary authority in the Peruvian regime of inflation targeting through the derivation of optimal monetary rules. To achieve that, we used a calibration strategy based on the choice of values of the parameters of preferences that minimize the square deviation between the true interest rate and interest rate optimal simulation. The results showed that the monetary authority has applied a system of flexible inflation targeting, prioritizing the stabilization of inflation, but without disregarding gradualism in interest rates. On the other hand, concern over output stabilization has been minimal, revealing that the output gap has been important because it contains information about future inflation and not because it is considered a variable goal in itself. Finally, when the smoothing of the nominal exchange rate is considered in the loss function of the monetary authority, the rank order of preferences has been maintained and the smoothing of the exchange rate proved insignificant.