The impact of monetary and exchange rate shocks on inflation and output in the Philippines: a vector autoregression approach.

Date

4-2009

Degree

Bachelor of Science in Economics

College

College of Economics and Management (CEM)

Adviser/Committee Chair

Amelia L. Bello

Abstract

The study examined the empirical relationship among exchange rate movements, inflation and output in the Philippines using a Vector Autoregression (VAR) model. Specific econometric techniques, such as forecast error variance decompositions and impulse response analysis were employed using several VAR models. The results of the variance decompositions indicate that the main sources of variance in the real exchange rate, inflation and output are their “own” shocks. The results of the monetary shock transmission mechanism models are mixed, in models 1 and 3, money supply movements are more important in explaining the inflation rate than in explaining the real output, while in model 2, money supply movements are more important in explaining the real output than in explaining the inflation rate. In both models of the exchange rate shock transmission mechanism, the real exchange rate is more important in explaining the inflation rate than in explaining the real output. Based from the impulse response functions of the monetary shock transmission mechanism models, positive shocks in the M1 money supply have no significant impact on the domestic credit and the real lending interest rate. The impulse response functions of models 1 and 2 of the monetary shock transmission indicate that an expansionary monetary policy in the future would increase real output from the second up to the twentieth quarters. On the other hand, the impulse response functions of model 3 suggest that an expansionary monetary policy would raise real output from the second up to the twelfth, fourteenth up to the sixteenth and the twentieth quarters. The impulse response functions of the monetary shock transmission mechanism models also found evidence of a “price puzzle” and “price stickiness” impacts of a positive monetary shock. The results of impulse response functions of model 1 of the exchange rate shock transmission mechanism models indicates that shocks in the real exchange rate has no significant impact on the trade balance but has a significant positive impact on the real output. However, the positive impact of an appreciation shock on real output tends to be short-lived. Both models of the exchange rate shock transmission mechanism models suggest that the depreciation of the real exchange rate has a short-lived inflationary impact on prices.

Language

English

Location

UPLB College of Economics and Management

Call Number

LG 993.5 2009 E2 V37

Document Type

Thesis

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