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Bangko Sentral ng Pilipinas The BSP’s Structural Long-Term Inflation Forecasting Model for the Philippines.

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Presentation on theme: "Bangko Sentral ng Pilipinas The BSP’s Structural Long-Term Inflation Forecasting Model for the Philippines."— Presentation transcript:

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2 Bangko Sentral ng Pilipinas The BSP’s Structural Long-Term Inflation Forecasting Model for the Philippines

3 Bangko Sentral ng Pilipinas Objectives of the BSP’s Macroeconometric Modelling Efforts  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;

4 Bangko Sentral ng Pilipinas 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

5 Bangko Sentral ng Pilipinas Main Characteristics of the BSP MacroModel  Partitions the Philippine economy into seven major blocs: Price Bloc Production Bloc Labor Bloc Expenditure Bloc BOP Bloc Monetary Bloc Fiscal Bloc

6 Bangko Sentral ng Pilipinas Complete Version of the BSP MacroModel 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 TOTAL 38 40 78

7 Bangko Sentral ng Pilipinas Flowchart of the BSP’s Structural Long-Term Inflation Forecasting Model

8 Bangko Sentral ng Pilipinas UNEMP RATE LFPRLFEmployment GDPPROD WAGES PGDP CPIFUELCPIRICECPICORE GNPGDP CPI GDPEXP Consumption X-M Investments ERPOIL$ IMPLICIT PRICE DEFLATORS World Prices Exports/Imports World Trade Gap BOP CREDIT PRIV/PUB TBILL91 RATE M3 OMO Reserve req’ts Onite RRP rate POPULATION Budget Govt Rev/Exp Govt PRODUCTIVITY NFIA STOCKCAP LIBOR90 P/$ ER STAT DISC

9 Bangko Sentral ng Pilipinas Main Characteristics…cont’d  Provides more detail in the determination of prices in the economy CPI =.1840 CPIFOOD +.0574 CPIFUEL +.7586 CPICORE +.7586 CPICORE

10 Bangko Sentral ng Pilipinas 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

11 Bangko Sentral ng Pilipinas BSPPolicyLeversMoneyMultiplierBaseMoneyCoreandHeadlineInflationWagesEmploymentOutput Transmission Mechanism

12 Bangko Sentral ng Pilipinas Flowchart of the Monetary Bloc

13 Bangko Sentral ng Pilipinas TBILL91 PGDP RDEPOSIT BMM3 MM NDABSPNFABSP RM RR REGS RESPOS GDP Budget CPS BOP Public Investment Private Investment Public Credit Private Credit Other NDA O-NITE OMO RRPS Others BSP Tbills SDA CPE LDR RLR LIQRES Rest of Priv Credits

14 Bangko Sentral ng Pilipinas Modelling the Transmission Mechanism of Monetary Policy 1.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

15 Bangko Sentral ng Pilipinas 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

16 Bangko Sentral ng Pilipinas Modelling the Transmission Mechanism of Monetary Policy, cont’d 9. LOG(IP) = ƒ{DLOG(GDP(-1)**, [(TBILL91 (-1) – PCPIINF(-1)]*, BOPCAPBALN$(-1)**, (CREDITPRIV/PGDP)**, (ER/PGDP)**} 10.COMPNAGRIPCT = {UNEMPRATE**, PGDPINF(-1)*} COMPNAGRI = COMPNAGRI(-1)*(1 + (COMPNAGRIPCT/100)) 11. DLOG(PIFC) = ƒ{DLOG(PMCAP)**, [BALNG_NEW(-1)/GDPN(- 1)]**, [DLOG(PGDP(-1)]**, (TBILL91-PGDPINF)**, DLOG(PCPIFUEL)**, D99**} 12. DLOG(PGDP) = ƒ{[DLOG(COMPNAGRI*NEMPFTE/GDP)]**, DLOG(PIFC*KAPITAL/GDP)**, LOG(ER*POIL$*MFUEL/GDP)**, D84**, D92**}

17 Bangko Sentral ng Pilipinas In-Sample Forecasting Performance of the Model 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. Statistics used:

18 Bangko Sentral ng Pilipinas Error Statistics Static Simulation, 1988-2001 MAPEMAE 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-bill0.8 Inflation Rate1.2 Unemployment Rate0.7

19 Bangko Sentral ng Pilipinas 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

20 Bangko Sentral ng Pilipinas - Impact of a Sustained One-Percentage Point Shock in the RRP Rate: Change Relative to Baseline

21 Bangko Sentral ng Pilipinas - Impact of a Sustained One-Percentage Point Reduction in the Volume of Trade: Change Relative to Baseline

22 Bangko Sentral ng Pilipinas Website:www.bsp.gov.ph E-mail:bspmail@bsp.gov.ph Thank you!


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