Regional inflation spillovers and monetary policy design

Abstract

Should emerging market central banks anchor inflation targeting to capital cities or national aggregates? Peru's Central Reserve Bank has achieved Latin America's lowest inflation (2.96 % average annual between 2001 and 2024) using Lima's CPI—an uncommon choice raising equity concerns. Using frequency-domain spillover analysis on monthly data (2002–2024) across nine regions, we find Lima dominates long-run transmission (NET: 27.23 pp) but absorbs short-run agricultural shocks. We recommend maintaining Lima-centered targeting while integrating upstream food-region signals into forecasts and developing crisis-adaptive frameworks. These findings validate Peru's approach and provide actionable guidance for spatially heterogeneous inflation-targeting economies.