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

Bangko Sentral ng PilipinasBangko Sentral ng Pilipinas

The BSP’s Structural The BSP’s Structural Long-Term Inflation Long-Term Inflation

Forecasting Model for the Forecasting Model for the PhilippinesPhilippines


Objectives of the BSP’s Objectives of the BSP’s Macroeconometric Macroeconometric Modelling EffortsModelling Efforts

To construct a structural long-term annual To construct a structural long-term annual macromodel of the Philippine economy that will macromodel of the Philippine economy that will serve as a quantitative tool of the BSP to forecast serve as a quantitative tool of the BSP to forecast headline and core inflation rates one to two years headline and core inflation rates one to two years in the future;in the future;

To analyze the impact on headline and core To analyze the impact on headline and core inflation of key factors such as the exchange rate, inflation of key factors such as the exchange rate, world oil price, interest rates, wages, government world oil price, interest rates, wages, government borrowing and other relevant variables;borrowing and other relevant variables;


Objectives…cont’dObjectives…cont’d

to determine the effectiveness of different channels to determine the effectiveness of different channels and instruments of monetary policy, with special and instruments of monetary policy, with special attention to the impact of changes in the BSP’s attention to the impact of changes in the BSP’s policy levers, namely, the short-term borrowing and policy levers, namely, the short-term borrowing and lending rateslending rates

to guide monetary authorities in their decision to guide monetary authorities in their decision making process pertaining to the appropriate making process pertaining to the appropriate policies for the attainment of the BSP’s primary policies for the attainment of the BSP’s primary mandate of promoting price stability conducive to mandate of promoting price stability conducive to balanced and sustainable economic growthbalanced and sustainable economic growth


Main Characteristics of the Main Characteristics of the BSP MacroModelBSP MacroModel

Partitions the Philippine economy into seven Partitions the Philippine economy into seven major blocs:major blocs:

Price Bloc

Production Bloc

LaborBloc

Expenditure Bloc

BOP Bloc

Monetary Bloc

Fiscal Bloc


Complete Version of the BSP Complete Version of the BSP MacroModelMacroModel

Count of EquationsCount of Equations

BLOCBLOC Behavioral Identities Total Behavioral Identities Total

ExpenditureExpenditure 9 9 10 10 19 19Monetary Monetary 9 9 11 11 20 20Fiscal Fiscal 4 4 6 6 11 11Price Price 12 12 6 6 18 18LaborLabor 1 1 3 3 4 4ProductionProduction 1 1 1 1 2 2 BOPBOP 2 2 3 3 5 5

TOTALTOTAL 38 38 40 40 78 78


Flowchart of the BSP’s Flowchart of the BSP’s Structural Structural

Long-Term Inflation Long-Term Inflation Forecasting Model Forecasting Model


UNEMPRATE

LFPR LF EmploymentGDPPROD

WAGES

PGDP

CPIFUEL CPIRICE CPICORE

GNP GDP

CPIGDPEXP

Consumption X-M InvestmentsER POIL$

IMPLICITPRICE

DEFLATORS

World PricesExports/Imports

World TradeGap

BOP CREDITPRIV/PUBTBILL91

RATE

M3

OMO

Reservereq’ts

OniteRRP rate

POPULATION

BudgetGovt

Rev/ExpGovt

PRODUCTIVITY

NFIA

STOCKCAP

LIBOR90P/$ ER

STATDISC


Main Characteristics…cont’dMain Characteristics…cont’d

Provides more detail in the Provides more detail in the determination of prices in the economydetermination of prices in the economy

CPI = .1840 CPIFOOD + .0574 CPI = .1840 CPIFOOD + .0574 CPIFUELCPIFUEL

+ .7586 CPICORE+ .7586 CPICORE


Main Characteristics…cont’dMain Characteristics…cont’d

Explicitly incorporates the BSP’s Explicitly incorporates the BSP’s policy levers, namely:policy levers, namely: the overnight interest rate on the overnight interest rate on

RRP’s RRP’s statutory reserve ratio statutory reserve ratio

requirementsrequirements liquidity reserve ratio requirementsliquidity reserve ratio requirements


BSPBSPPolicyPolicyLeversLevers

MoneyMoneyMultiplierMultiplier

BaseBaseMoneyMoney

Core Core andand

HeadlineHeadlineInflationInflation

WagesWages

EmploymentEmployment

OutputOutput

Transmission MechanismTransmission Mechanism


Flowchart Flowchart of the of the

Monetary BlocMonetary Bloc


TBILL91

PGDP

RDEPOSIT

BMM3

MM

NDABSPNFABSP

RM

RR

REGSRESPOS

GDP

Budget CPS

BOP

PublicInvestment

PrivateInvestment

PublicCredit

PrivateCredit Other NDA

O-NITE

OMO

RRPS OthersBSP Tbills SDA

CPE

LDRRLR

LIQRES

Rest ofPriv Credits


Modelling the Transmission Modelling the Transmission Mechanism of Monetary PolicyMechanism of Monetary Policy

1.1. RRPS/TD = ƒ{(RONIGHTRRP – RLENDING)**, RRPS/TD = ƒ{(RONIGHTRRP – RLENDING)**, [DLOG(STOCKPRICE)]**, LIBOR90**, D96**, [DLOG(STOCKPRICE)]**, LIBOR90**, D96**, D97**, Y2K**}D97**, Y2K**}

2. 2. OMO = BBILLS + SDA + BSPTBILLS + RRPS OMO = BBILLS + SDA + BSPTBILLS + RRPS + OMOTHER+ OMOTHER

3. 3. NDABSP = OMO + NGDEPOSIT + NDABSP = OMO + NGDEPOSIT + NDABSPOTHERNDABSPOTHER

4. RM = NFABSP + NDABSP4. RM = NFABSP + NDABSP


5. BM = RM + LIQRES + REGS + RESPOSITION 5. BM = RM + LIQRES + REGS + RESPOSITION

6. 6. MM = (1 + CDR) / (CDR + RDR + MM = (1 + CDR) / (CDR + RDR + (CASHINVDMB / TD) + LDR + ((REGS + (CASHINVDMB / TD) + LDR + ((REGS + RESPOSITION) / TD))RESPOSITION) / TD))

7. M3 = MM*BM7. M3 = MM*BM

8. TBILL91 = ƒ{[LOG(M3(-1)/PCPI(-1)/100)]*, 8. TBILL91 = ƒ{[LOG(M3(-1)/PCPI(-1)/100)]*, LOG(GDP), [(DLOG(PCPI)*100)]**, LOG(GDP), [(DLOG(PCPI)*100)]**, RONIGHTRRP**, LIBOR90**, BALNG_NEW**}RONIGHTRRP**, LIBOR90**, BALNG_NEW**}

Modelling the Transmission Modelling the Transmission Mechanism of Monetary Policy, cont’dMechanism of Monetary Policy, cont’d


Modelling the Transmission Modelling the Transmission Mechanism of Monetary Policy, cont’dMechanism of Monetary Policy, cont’d

9. 9. LOG(IP) = ƒ{DLOG(GDP(-1)**, [(TBILL91 (-1) – PCPIINF(-LOG(IP) = ƒ{DLOG(GDP(-1)**, [(TBILL91 (-1) – PCPIINF(-1)]*, BOPCAPBALN$(-1)**, (CREDITPRIV/PGDP)**, 1)]*, BOPCAPBALN$(-1)**, (CREDITPRIV/PGDP)**, (ER/PGDP)**} (ER/PGDP)**}

10.10. COMPNAGRIPCT = {UNEMPRATE**, PGDPINF(-1)*}COMPNAGRIPCT = {UNEMPRATE**, PGDPINF(-1)*}

COMPNAGRI = COMPNAGRI(-1)*(1 + COMPNAGRI = COMPNAGRI(-1)*(1 + (COMPNAGRIPCT/100))(COMPNAGRIPCT/100))

11. 11. DLOG(PIFC) = ƒ{DLOG(PMCAP)**, DLOG(PIFC) = ƒ{DLOG(PMCAP)**, [BALNG_NEW(-1)/GDPN(-1)]**, [DLOG(PGDP(-1)]**, [BALNG_NEW(-1)/GDPN(-1)]**, [DLOG(PGDP(-1)]**, (TBILL91-PGDPINF)**, DLOG(PCPIFUEL)**, D99**}(TBILL91-PGDPINF)**, DLOG(PCPIFUEL)**, D99**}

12. DLOG(PGDP) = ƒ{[DLOG(COMPNAGRI*NEMPFTE/GDP)]**, 12. DLOG(PGDP) = ƒ{[DLOG(COMPNAGRI*NEMPFTE/GDP)]**, DLOG(PIFC*KAPITAL/GDP)**, DLOG(PIFC*KAPITAL/GDP)**, LOG(ER*POIL$*MFUEL/GDP)**, D84**, D92**} LOG(ER*POIL$*MFUEL/GDP)**, D84**, D92**}


In-Sample Forecasting In-Sample Forecasting Performance of the ModelPerformance of the Model

Mean absolute error:Mean absolute error:MAE = (1/n) MAE = (1/n) P - AP - A

Mean absolute percent error:Mean absolute percent error:MAPE = (1/n) MAPE = (1/n) (P – A)/A(P – A)/A*100*100

where:where:A = actual valueA = actual valueP = predicted or simulated by the modelP = predicted or simulated by the modeln = number of periods covered by the n = number of periods covered by the

simulation.simulation.

Statistics used:Statistics used:


Error StatisticsError StatisticsStatic Simulation, 1988-2001Static Simulation, 1988-2001

MAPE MAE

Base Money 3.8 Wage (COMPNAGRI) 2.5Private Consumption 1.0GDP 1.2Total Investment 5.0Imports 1.8M3 4.4Exports 2.8GDP Implicit Price Index 1.691-day T-bill 0.8Inflation Rate 1.2Unemployment Rate 0.7


Simulation ExercisesSimulation Exercises

Impact of a sustained one-Impact of a sustained one-percentage point shock the RRP percentage point shock the RRP RateRate

Impact of a sustained one-Impact of a sustained one-percentage point reduction in the percentage point reduction in the volume of tradevolume of trade


-

Impact of a Sustained One-Percentage Point Impact of a Sustained One-Percentage Point Shock Shock

in the RRP Rate: Change Relative to Baselinein the RRP Rate: Change Relative to Baseline

-1.6

-1.2

-0.8

-0.4

0.0

0.4

90 91 92 93 94 95 96 97 98 99 00 01

GDP growthInflation (percentage point)M3InvestmentTbill 91-day (percentage point)

Impact of a Sustained One Percentage Point Increase in theRRP Rate: Impact Relative to the Baseline

Perce

nt


-

Impact of a Sustained One-Percentage Point Impact of a Sustained One-Percentage Point Reduction in the Volume of Trade: Change Reduction in the Volume of Trade: Change

Relative to BaselineRelative to Baseline

-1.6

-1.2

-0.8

-0.4

0.0

0.4

90 91 92 93 94 95 96 97 98 99 00 01

Exports of goodsGDP growth

Inflation (percentage point)Investment

Impact of a Sustained One Percentage Point Decease in theVolume of World Trade: Impact Relative to Baseline

perce

nt


Website:Website: www.bsp.gov.phwww.bsp.gov.phE-mail:E-mail: [email protected]@bsp.gov.ph

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

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