Effects of Monetary Policy and the External Sector on Peru’s Economic Cycles

This study aims to determine the effects of monetary policy and external economic activity on Peru’s economic cycles during the period 2003–2019, within the framework of implementing the explicit inflation-targeting approach. It contributes as evidence of the effectiveness of this approach for making economic policy decisions. Four equations were estimated: an aggregate demand (AD) curve, an aggregate supply (AS) curve, an exchange rate dynamics equation, and the Taylor rule. The generalized method of moments (GMM) in a system was employed as the estimation method. The results indicate that the effect of the external sector was more significant than that of monetary policy on Peru’s economic cycle during the analyzed period. Additionally, the hybrid nature of the aggregate supply and demand curves with a predominant forward-looking role is revealed. Finally, it is found that the monetary authority not only aims to maintain inflation within the target range but also seeks output stability.