TRANSNATIONAL BANKS AND DYNAMICS OF INFLATION IN PERU: A SIMPLE ECONOMETRIC MACRO MODEL (FOREIGN DEBT, INTERNATIONAL BANKING, FINANCE)

By examining inflation during 1960-1980 within a general equilibrium approach, this dissertation attempts to relate external credit to domestic prices. It seeks to determine whether excess availability of foreign loans (official and private) reinforces inflationary pressures in the Peruvian economy. It is also concerned with international banking operations and the evolution of the foreign debt. A macroeconometric model is formulated and estimated based on the view that foreign prices, aggregate demand, and money supply are important determinants of inflation. The model is divided into the expenditure and fiscal-monetary-balance-of-payments sectors. Generalized least squares and three-stage least squares systems methods are applied using annual observations. Based on Theil's accuracy analysis criteria and the evidence obtained from the dynamic solution, is concluded that the model tracks the data reasonably well. Increases in bank loans are found to have over time significant effects on increasing aggregate demand, fiscal deficits, reserve money, and money supply, and that such increases have a positive impact on prices. It is also found that initially official lending has a positive and greater effect on domestic demand and budget deficits, and relatively more inflationary consequences, than bank loans. Increases in nonbank lending are associated with an approximately equal increase in government consumption. The evidence supports the proposition that official credit is relatively more inflationary than bank credit initially; however, the long-run impact of official lending is negative, while that for bank lending is positive. It is concluded that there is no substantial trade off between inflation and excess availability of foreign capital borrowing during the period under consideration. By contracting foreign borrowing, it appears that inflation will not be reduced significantly. The role of bank financing in facilitating Peruvian economic growth is not as great as it has been assumed to be in academic and journalistic discussions in recent years. Declines in inflation seem to require the control of demand and credit, and the reduction of budget deficits. Finally, there is empirical reason to conclude that increases in external capital borrowing are linked to increases in the general level of prices.