Time changing effects of external shocks on macroeconomic fluctuations in Peru: empirical application using regime-switching VAR models with stochastic volatility

• Published in: Review of world economics Vol. 159; no. 2; pp. 505 - 544
• Main Authors: Chávez, Paulo, Rodríguez, Gabriel
• Format: Journal Article
• Language: English
• Published: Berlin/Heidelberg Springer Berlin Heidelberg 01.05.2023; Springer Nature B.V
• Subjects: Commodity prices; Economic Policy; Economic theory; Economics; Economics and Finance; Election results; European Integration; Exports; Free markets; GDP; Global economy; Gross Domestic Product; Inflation; International Economics; International finance; International trade; Macroeconomics; Macroeconomics/Monetary Economics//Financial Economics; Monetary policy; Original Paper; Presidential elections; Robustness; Volatility; Peru; China; Macroeconomic fluctuations; C52; External shocks; Regime-switching autoregressive vectors; C11; F41; C32; E32; Peruvian economy; Stochastic volatility; Model comparison
• ISSN: 1610-2878; 1610-2886
• DOI: 10.1007/s10290-022-00474-1

This article quantifies and analyzes the evolving impact of external shocks on Peru’s macroeconomic fluctuations in 1994Q1–2019Q4. For this purpose, we use a group of models with regime-switching time-varying parameters and stochastic volatility (RS-VAR-SV), as proposed by Chan and Eisenstat (J Appl Econ 33(4):509–532, 2018. https://doi.org/10.1002/jae.2617 ). The data suggest a model with contemporaneous coefficients and constant lags and intercepts, but with regime-switching variances; and point to the existence of two regimes. The IRFs, FEVDs, and HDs show that: (i) China growth shocks have a higher impact on Peru’s output growth (around 0.8%); (ii) financial shocks contract domestic output growth by 0.3% and domestic monetary policy is synchronized with Fed rate movements; (iii) external shocks explain 35% and 70% of output fluctuations under regimes 1 and 2, respectively; and (iv) China growth shocks contributed 1.0 p.p. to the 1.1-p.p. increase (around 89%) in Peru’s output growth between regimes 1 and 2. Additionally, we validate these results by performing seven robustness exercises consisting in changing priors, reordering variables, changing variables, and using four different specifications for the baseline model.