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Abstract
Between 2016 and 2023 Peru cycled through seven presidents, a presidential self-coup, and deadly mass protests, yet its sovereign spread fell to historic lows. We document this over 2000–2025 and trace it to the credibility of the Central Reserve Bank of Peru under Governor Julio Velarde, appointed in 2006. Before 2006 the average political event moved Peru’s sovereign spread by 41 basis points; afterward the response is indistinguishable from zero. The instability–spread correlation flips from +0.55 to −0.23, daily spread volatility falls more than threefold, and the market response decays with the governor’s tenure. We rationalize these facts with a model combining monetary-policy delegation, sovereign-spread pricing, and Bayesian learning about the governor’s type, which yields an insulation theorem, a variance-reduction ratio, and a tenure-decay coefficient, each matched to an estimate. An endogenous structural-break test rejects a sharp 2006 transition in favor of gradual accumulation through the Velarde era, and the decoupling survives global controls.
Keywords
Central Bank Credibility, Sovereign Spreads, Monetary-Policy Delegation, Political Instability, Bayesian Learning, Peru
Citation
Chávez Padilla, Carlos César. 2026. “When Bad Institutions Meet Good Ones: The Peruvian Puzzle.” Working paper.