Targeting Inflation in a Dollarized Economy: The Peruvian Experience

Abstract

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Inflation targeting at the crossroads: Evidence from post-communist economies during the crisis

“…This is expected since, as explained in Section 3, having a large portion of the budget deficit being financed by the central bank, would jeopardize the achievement of the inflation target and may result in higher interest rates suffocating the economy, but not easing inflation. The insignificance of the other three preconditions is in line with Mishkin (2004), who argues that albeit in many cases these were far from being fulfilled, countries pursued successful IT; it is also in line with the findings of Leiderman et al (2006) and Armas and Grippa (2006) who find no role for euroization in the IT economies of South America. Nevertheless, against the hesitant finding that only one precondition matters for short-run growth under IT during crisis, we find that the four preconditions jointly have a statistically significant explanatory power on growth decline at the 5% level.…”

Inflation Targeting in Peru: The Reasons for the Success

“…The adoption of the inflation targeting system occurred one year before, in 2002, while the transition (see BCRP, 2003;Armas and Grippa 2005) from control of a monetary aggregate, which was applied during the 1990s, toward control of a short term interest rate started in mid-2001. A second important instrument, which came to the fore from 2007-2008, has been the reserve requirement ratio for deposits in local currency.…”

Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation

“…Indeed, empirical literature has provided evidence that tax revenue is negatively affected by inflation, the so-called Olivera-Tanzi effect (Tanzi, 1992). This inverse relationship is usually explained by the fact that the real value of tax revenue is eroded by according to Armas and Grippa (2006), Peru is the only highly financially dollarized economy that has adopted IT.…”