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The Long-run Relationship among World Oil Price, Exchange Rate and Inflation in the Philippines

Author

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  • Deluna, Roperto Jr

Abstract

This study was conducted to determine the long-run relationship among world oil price (WOP), Philippine inflation rate (IR) and exchange rate (ER). Results of the Augmented Dickey Fuller (ADF) tests of the variables revealed that all three series are not stationary in the process and were subjected to first differencing. ADF further revealed that the three series are integrated of order 1 or I(1). Therefore, vector error correction model (VECM) was used to examine the relationship of the three variables. VECM revealed a positive long-run relationship between IR and WOP, and IR and ER. A unit increase of the world oil price will increase Philippine inflation by 0.31%. While, a unit increase in exchange rate (PhP: USD) will increase inflation rate by 0.42%. In terms of ER, results revealed that an increase in the past values of WOP will increase ER. However, ER is not affected by the past values of IR. Result of the granger causality shows that all of the other variables jointly granger cause and individually granger cause inflation rate. Changes in ER cannot be predicted by joint and individual changes in the previous periods of WOP and IR.

Suggested Citation

  • Deluna, Roperto Jr, 2014. "The Long-run Relationship among World Oil Price, Exchange Rate and Inflation in the Philippines," MPRA Paper 60116, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:60116
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    References listed on IDEAS

    as
    1. Cunado, J. & Perez de Gracia, F., 2005. "Oil prices, economic activity and inflation: evidence for some Asian countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 45(1), pages 65-83, February.
    2. Le Viet Trung & Nguyen Thi Thuy Vinh, 2011. "The impact of oil prices, real effective exchange rate and inflation on economic activity: Novel evidence for Vietnam," Discussion Paper Series DP2011-09, Research Institute for Economics & Business Administration, Kobe University.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    VECM; inflation; world oil price; exchange rate;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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