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

Economic development. --- International finance. --- International Monetary Fund. --- Investments, Foreign -- Risk management -- Peru -- Econometric models. --- Peru -- Foreign economic relations -- China. --- Peru -- Foreign economic relations -- United States. --- Business & Economics --- Economic History --- Foreign Exchange --- Inflation --- Macroeconomics --- Production and Operations Management --- General Aggregative Models: Keynes --- Keynesian --- Post-Keynesian --- General Aggregative Models: Forecasting and Simulation --- Monetary Policy --- Central Banks and Their Policies --- Open Economy Macroeconomics --- Globalization: Macroeconomic Impacts --- Macroeconomics: Production --- Price Level --- Deflation --- Metals and Metal Products --- Cement --- Glass --- Ceramics --- Currency --- Foreign exchange --- Output gap --- Exchange rates --- Exchange rate flexibility --- Metal prices --- Production --- Prices --- Economic theory --- Metals --- China, People's Republic of

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This paper discusses key findings of the Second Review Under the Stand-By Arrangement for Peru. The economy continued to perform well in 2004. Real GDP grew by 5.1 percent, inflation was 3.5 percent at end-December, and the fiscal deficit of the combined public sector narrowed to 1.1 percent of GDP. However, poverty remains high. The reform of the preferential public pension regime was approved in mid-December, and the authorities are making progress toward awarding transportation infrastructure in concession to the private sector.

International Monetary Fund. --- International Monetary Fund. -- Peru. --- Peru -- Economic policy. --- Peru -- Foreign economic relations. --- Exports and Imports --- Macroeconomics --- Money and Monetary Policy --- Public Finance --- Industries: Financial Services --- Banks and Banking --- Debt --- Debt Management --- Sovereign Debt --- Public Enterprises --- Public-Private Enterprises --- Monetary Systems --- Standards --- Regimes --- Government and the Monetary System --- Payment Systems --- International Lending and Debt Problems --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary Policy --- Public finance & taxation --- Civil service & public sector --- Monetary economics --- International economics --- Finance --- Banking --- Public debt --- Public sector --- Currencies --- External debt --- Loans --- Economic sectors --- Money --- International reserves --- Central banks --- Debts, Public --- Finance, Public --- Debts, External --- Foreign exchange reserves --- Peru