Monetary aggregates and monetary policy: an empirical assessment for Peru

In recent years the theoretical and empirical literature has shown a tendency to discard the use of money in monetary policy. This paper provides an empirical evaluation of the relevance of monetary aggregates in the conduct of monetary policy in Peru, a small open and partially dollarized economy. Based on recursive analysis of vector error correction models and allowing for structural breaks, we find that M3 is the only monetary aggregate that helps forecast inflation in Peru and therefore can be useful in monetary policy. There is no clear evidence about the usefulness of any other narrower monetary aggregate either as a potential monetary policy instrument or as an information variable.