Measuring External Risks for Peru: Insights from a Macroeconomic Model for a Small Open and Partially Dollarized Economy

25 Pages Posted: 2 Jun 2015

See all articles by Fei Han

Fei Han

International Monetary Fund (IMF)

Date Written: September 2014

Abstract

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 flexibility and a lower degree of dollarization, which could help mitigate the negative spillover effects of these external risks.

Keywords: External shocks, Peru, Foreign investment, China, United States, Monetary policy, Dollarization, Small open economies, Economic models, Macroeconomic Model, Partial Dollarization, External Risk, Spillovers, Macroeconomic Forecast, inflation

JEL Classification: C36, E12, E17, E52, E58, F41, F62

Suggested Citation

Han, Fei, Measuring External Risks for Peru: Insights from a Macroeconomic Model for a Small Open and Partially Dollarized Economy (September 2014). IMF Working Paper No. 14/161, Available at SSRN: https://ssrn.com/abstract=2613293

Fei Han (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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