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Monetary Transmission Mechanism in the Philippines: A VAR Approach

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  • Vargas, Jerrick Jan

Abstract

It is necessary for policy makers to understand how the monetary policy is transmitted to the economy through different channels. This study focused on the reduced-form relationships between money, real output and price level and “channel” variables such as domestic credit, exchange rate and real lending interest rate and examined the monetary transmission mechanism in the Philippines, using the vector autoregression approach (VAR). The results derived from the forecast error variance decompositions analyses show that the main sources of variances in output and price level are their “own” shocks. The results of the impulse response functions indicate that monetary policy can affect output and price level and that the effect of monetary policy on output was strongest after two quarters. An expansionary monetary policy increases output in two quarters however; it has a weak effect on price level after two quarters. Furthermore, domestic credit has the most significant effect on output in the Philippines. Theories in monetary economics suggest that an expansionary monetary policy increases output and price level however, in the case of the Philippines, an expansionary monetary policy increases output but have a weak effect on inflation.

Suggested Citation

  • Vargas, Jerrick Jan, 2021. "Monetary Transmission Mechanism in the Philippines: A VAR Approach," MPRA Paper 107507, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107507
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    File URL: https://mpra.ub.uni-muenchen.de/107507/1/MPRA_paper_107507.pdf
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    References listed on IDEAS

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    1. Peter N. Ireland, 2005. "The Monetary Transmission Mechanism," Boston College Working Papers in Economics 628, Boston College Department of Economics.
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    More about this item

    Keywords

    Monetary Policy; Vector Autoregression;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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