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The BSP’s Structural Long-Term Inflation Forecasting Model for the Philippines

The BSP’s Structural Long-Term Inflation Forecasting Model for the Philippines. To construct a structural long-term annual macromodel of the Philippine economy that will serve as a quantitative tool of the BSP to forecast headline and core inflation rates one to two years in the future;

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The BSP’s Structural Long-Term Inflation Forecasting Model for the Philippines

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  1. The BSP’s Structural Long-Term Inflation Forecasting Model for the Philippines

  2. To construct a structural long-term annual macromodel of the Philippine economy that will serve as a quantitative tool of the BSP to forecast headline and core inflation rates one to two years in the future; To analyze the impact on headline and core inflation of key factors such as the exchange rate, world oil price, interest rates, wages, government borrowing and other relevant variables; Objectives of the BSP’s Macroeconometric Modelling Efforts

  3. Objectives…cont’d • to determine the effectiveness of different channels and instruments of monetary policy, with special attention to the impact of changes in the BSP’s policy levers, namely, the short-term borrowing and lending rates • to guide monetary authorities in their decision making process pertaining to the appropriate policies for the attainment of the BSP’s primary mandate of promoting price stability conducive to balanced and sustainable economic growth

  4. Main Characteristics of the BSP MacroModel • Partitions the Philippine economy into seven major blocs: Price Bloc Expenditure Bloc Production Bloc BOP Bloc Labor Bloc Monetary Bloc Fiscal Bloc

  5. Count of Equations BLOC Behavioral Identities Total Expenditure 9 10 19 Monetary 9 11 20 Fiscal 4 6 11 Price 12 6 18 Labor 1 3 4 Production 1 1 2 BOP 2 3 5 TOTAL 38 40 78 Complete Version of the BSP MacroModel

  6. Flowchart of the BSP’s Structural Long-Term Inflation Forecasting Model

  7. PRODUCTIVITY UNEMP RATE POPULATION LFPR LF Employment GDPPROD WAGES NFIA PGDP GNP GDP CPIFUEL CPIRICE CPICORE STAT DISC GDPEXP STOCKCAP CPI X-M Investments Consumption ER POIL$ IMPLICIT PRICE DEFLATORS World Prices Exports/Imports World Trade Gap BOP CREDIT PRIV/PUB TBILL91 RATE M3 Budget Govt Reserve req’ts OMO Rev/Exp Govt Onite RRP rate LIBOR90 P/$ ER

  8. Main Characteristics…cont’d • Provides more detail in the determination of prices in the economy CPI = .1840 CPIFOOD + .0574 CPIFUEL + .7586 CPICORE

  9. Main Characteristics…cont’d • Explicitly incorporates the BSP’s policy levers, namely: • the overnight interest rate on RRP’s • statutory reserve ratio requirements • liquidity reserve ratio requirements

  10. Transmission Mechanism BSP Policy Levers Money Multiplier Base Money Core and Headline Inflation Wages Employment Output

  11. Flowchart of the Monetary Bloc

  12. TBILL91 REGS RESPOS PGDP CPE LIQRES M3 BM RDEPOSIT RM MM RR NFABSP NDABSP BOP GDP Budget CPS Public Credit Private Credit Other NDA Public Investment Private Investment OMO Rest of Priv Credits Others SDA BSP Tbills RRPS O-NITE RLR LDR

  13. RRPS/TD = ƒ{(RONIGHTRRP – RLENDING)**, [DLOG(STOCKPRICE)]**, LIBOR90**, D96**, D97**, Y2K**} 2. OMO = BBILLS + SDA + BSPTBILLS + RRPS + OMOTHER 3.   NDABSP = OMO + NGDEPOSIT + NDABSPOTHER 4. RM = NFABSP + NDABSP Modelling the Transmission Mechanism of Monetary Policy

  14. 5.   BM = RM + LIQRES + REGS + RESPOSITION 6. MM = (1 + CDR) / (CDR + RDR + (CASHINVDMB / TD) + LDR + ((REGS + RESPOSITION) / TD)) 7. M3 = MM*BM 8. TBILL91 = ƒ{[LOG(M3(-1)/PCPI(-1)/100)]*, LOG(GDP), [(DLOG(PCPI)*100)]**, RONIGHTRRP**, LIBOR90**, BALNG_NEW**} Modelling the Transmission Mechanism of Monetary Policy, cont’d

  15. 9. LOG(IP) = ƒ{DLOG(GDP(-1)**, [(TBILL91 (-1) – PCPIINF(-1)]*, BOPCAPBALN$(-1)**, (CREDITPRIV/PGDP)**, (ER/PGDP)**} COMPNAGRIPCT = {UNEMPRATE**, PGDPINF(-1)*} COMPNAGRI = COMPNAGRI(-1)*(1 + (COMPNAGRIPCT/100)) 11. DLOG(PIFC) = ƒ{DLOG(PMCAP)**, [BALNG_NEW(-1)/GDPN(-1)]**, [DLOG(PGDP(-1)]**, (TBILL91-PGDPINF)**, DLOG(PCPIFUEL)**, D99**} 12. DLOG(PGDP) = ƒ{[DLOG(COMPNAGRI*NEMPFTE/GDP)]**, DLOG(PIFC*KAPITAL/GDP)**, LOG(ER*POIL$*MFUEL/GDP)**, D84**, D92**} Modelling the Transmission Mechanism of Monetary Policy, cont’d

  16. Mean absolute error: MAE = (1/n) P - A Mean absolute percent error: MAPE = (1/n) (P – A)/A*100 where: A = actual value P = predicted or simulated by the model n = number of periods covered by the simulation. In-Sample Forecasting Performance of the Model Statistics used:

  17. Error StatisticsStatic Simulation, 1988-2001 • MAPE MAE • Base Money 3.8 • Wage (COMPNAGRI) 2.5 • Private Consumption 1.0 • GDP 1.2 • Total Investment 5.0 • Imports 1.8 • M3 4.4 • Exports 2.8 • GDP Implicit Price Index 1.6 • 91-day T-bill 0.8 • Inflation Rate 1.2 • Unemployment Rate 0.7

  18. Simulation Exercises • Impact of a sustained one-percentage point shock the RRP Rate • Impact of a sustained one-percentage point reduction in the volume of trade

  19. Impact of a Sustained One-Percentage Point Shock in the RRP Rate: Change Relative to Baseline -

  20. Impact of a Sustained One-Percentage Point Reduction in the Volume of Trade: Change Relative to Baseline -

  21. Thank you! Website: www.bsp.gov.phE-mail: bspmail@bsp.gov.ph

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