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Monetary transmission mechanism in the Philippines : the interest rate channel

Author

Listed:
  • Francisco G. Dakila, Jr.
  • Ma. Digna G. Paraso

    (Bangko Sentral ng Pilipinas)

Abstract

The transmission mechanism of monetary policy explains how monetary policy works—that is, how economic and financial variables respond to monetary policy actions. In view of the complexity of the transmission process, properly identifying the process as it works in the Philippines requires considerable effort and volume of work. In the context of inflation targeting, for example, an understanding of the monetary policy transmission mechanism is essential to understanding what monetary policy can and should do and at what point in time actions should be undertaken to contain or offset disturbances that could threaten the achievement of the inflation target. In this paper, we concentrate on the interest rate channel. We present initial estimates, obtained from general-to-specific modeling, and validate the results using a vector error correction model. The results confirm expectations that an increase in the 91-day Tbill rate generates a lagged reduction in the level of fixed capital formation and a decline in GDP growth, which is strongest about four quarters after the interest rate shock. However, the results also show that there is likewise an initial increase in the inflation rate; by the eighth quarter, however, inflation falls below the baseline. We view our results as an initial step in a research program that seeks to specify the various channels of monetary policy impact.

Suggested Citation

  • Francisco G. Dakila, Jr. & Ma. Digna G. Paraso, 2005. "Monetary transmission mechanism in the Philippines : the interest rate channel," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 42(1), pages 55-80, June.
    • Handle: RePEc:phs:prejrn:v:42:y:2005:i:1:p:55-80
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    File URL: http://pre.econ.upd.edu.ph/index.php/pre/article/view/190/602
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    References listed on IDEAS

    as
    1. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
    2. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
    3. David Gruen & John Romalis & Naveen Chandra, 1999. "The Lags of Monetary Policy," The Economic Record, The Economic Society of Australia, vol. 75(3), pages 280-294, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    inflation targeting; interest rate; monetary policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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