Capturing the Linkages Between
Real and Financial Variables:
The Global Projection Model
for the Philippines
Ruperto Majuca and Joy Sinay
Real and Financial Variables
• Developments in the financial markets
affect the real economy and vice-versa
• Effects on liquidity, balance sheets, and
the capacity of the financial sector to
perform its typical intermediation functions
• Financial accelerator, flight to quality
• 2008/2009 global recession; Philippine
case
Comparison of Approaches
• Classical estimation, simultaneous
equations, VAR/SVAR/GVAR
• Dynamic stochastic general equilibrium
(DSGE) modeling and estimation (e.g.,
Majuca 2011)
• Global projection models
GLOBAL PROJECTION MODEL
• Global Projection Model (GPM) aims to
integrate the world economies.
• GPM will enable researchers to analyze the
effects of shocks in one country and of global
shocks to home economy and to the rest of
the economies integrated in the mode.
• It will give forecasters a new tool to assist
them in preparing worldwide forecasts and in
carrying out alternative policy simulations in
the global context.
Estimation Techniques
• Calibration
• Maximum likelihood
• Bayesian methods (combination of prior
and data)
Kalman filter
Markov Chain Monte Carlo
GPM 3 + Philippines Model
Potential Output
NAIRU
Equilibrium Real Interest Rate
GPM STOCHASTIC EQUATIONS
Equilibrium Real Exchange Rate
Output Gap (Aggregate Demand / IS Curve)
Inflation (New Keynesian Phillips Curve)
BEHAVIORAL EQUATIONS
Policy Interest Rate (Taylor Type Rule)
Uncovered Interest Parity (Bilateral Real Exchange Rate)
Unemployment Rate
Equations Incorporating BLT_US
EQUATIONS INCORPORATING BLT_US
MODIFIED EQUATIONS FOR PHILIPPINES
Equilibrium Real Exchange Rate
Inflation Rate
Uncovered Interest Parity
MODIFIED EQUATIONS FOR PHILIPPINES
Interest Rate
VARIANCE DECOMPOSITION
RES_PIE_EU
RES_BLT_US
RES_G_US
RES_Y_US
RES_Y_JA
26.74
13.66
2.04
0.85
0.75
3.8
2.46
1.48
0.84
GROWTH_PH
19.78
68.1
2.45
0.71
0.26
0.19
1.08
0.7
0.78
0.54
GROWTH4_PH
39.65
36.13
6.57
1.78
0.72
0.55
2.93
1.9
1.42
0.88
RR_PH
78.16
2.29
8.8
0.67
0.33
0.52
3.09
2
0.52
0.27
RES_PIE_PH
41.93
RES_Y_PH
Y_PH
RES_RS_PH
RES_RS_EU
RES_Y_EU
Top three sources from each country (in percent)
May 7
May 31
Y_PH
25.94
37.27
17.4
1.53
0.68
0.69
3.35
2.17
0.82
0.58
GROWTH_PH
7.86
78.44
2.9
0.45
0.18
0.14
0.69
0.45
0.29
0.28
GROWTH4_PH
20.20
47.91
8.72
1.33
0.57
0.48
2.24
1.46
0.71
0.57
RR_PH
54.15
4.9
21.01
0.61
0.31
0.51
3.05
1.98
0.39
0.25
RESULTS
US affecting PH
Bank Lending
Tightening
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
US affecting EU
Bank Lending
Tightening
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
US affecting JAPAN
Bank Lending
Tightening
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
US
Bank Lending
Tightening
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
Japan affecting PH
INFLATION
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
EU affecting PH
INFLATION
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
US affecting PH
INFLATION
RS
Nominal Interest
Rate
RR
Real Interest Rate
RESULTS
US AFFECTING PH
INTEREST
RATE
RS
Nominal Interest Rate
RR
Real Interest Rate
REER
Real Exchange Rate
RESULTS
EU affecting PH
NOMINAL
INTEREST
RATE
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
Japan Affecting PH
NOMINAL
INTEREST
RATE
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
US Affecting PH
NOMINAL
INTEREST
RATE
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Real Exchange
Rate
RESULTS
EU affecting PH
Real
Exchange
Rate
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
JAPAN affecting PH
Real
Exchange
Rate
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
Demand
Shock
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
Demand
Shock
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
Demand
Shock
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
Demand
Shock
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
Demand
Shock
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
Demand
Shock
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
Demand
Shock
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
RESULTS
Demand
Shock
RS
Nominal Interest
Rate
RR
Real Interest Rate
REER
Conclusions and Future Work, 1
• Philippine economy receptive to shocks
from other countries
• Bank lending conditions in the U.S. affect
the Philippine real economy
• Estimation results detail how conditions in
U.S., EU, Japan affect domestic economy
• Interactions between the financial and real
variables are important and captured by
the model
Conclusions and Future Work, 2
• China incorporated in future work (five
country framework)
• Oil and other important shocks may be
incorporated
• Structure shift (Markov switching)
Conclusions
GPM6 database for GPM3 countries
– Consumer price index
– Real gross domestic product
– Nominal interest rate
– Nominal exchange rate
– Unemployment rate
– Bank lending variable for US
Philippine data for Philippine block (compared
with GPM6 data for Philippines to verify)
– All data are seasonally adjusted
– CPI, GDP and ER are in logs
ESTIMATION
GPM6 database for GPM3 countries
– Consumer price index
– Real gross domestic product
– Nominal interest rate
– Nominal exchange rate
– Unemployment rate
– Bank lending variable for US
Philippine data for Philippine block (compared
with GPM6 data for Philippines to verify)
– All data are seasonally adjusted
– CPI, GDP and ER are in logs
The Global Projection Model for
the Philippines
Thank you!
DATA
GPM6 database for GPM3 countries
– Consumer price index
– Real gross domestic product
– Nominal interest rate
– Nominal exchange rate
– Unemployment rate
– Bank lending variable for US
Philippine data for Philippine block (compared with
GPM6 data for Philippines to verify)
– All data are seasonally adjusted
– CPI, GDP and ER are in logs
DATA
410
20
Nominal Exchange Rate
Nominal Interest Rate
16
390
12
370
8
4
350
LS
RS
LS_IMF
14
Unemployment Rate
12
10
8
6
UNR
UNR_IMF
RS_IMF
DATA
100
Consumer Price Index (in logs)
80
60
40
20
LCPI
600
LCPI_IMF
Real Gross Domestic Product (in logs)
580
560
540
520
LGDP
LGDP_IMF
Unemployment Rate (UNR)
14
12
10
8
UNR_US
UNR_EU
6
4
2
0
UNR_JA
UNR_PH
Real Exchange Rate (LS)
600
500
400
300
LS_EU
LS_JA
200
100
0
-100
LS_PH
Interest Rate (RS)
8
7
6
5
4
3
2
1
0
RS_US
RS_EU
RS_JA
RS_PH
Real Consumer Price Index (LCPI)
100
90
80
70
60
50
40
30
20
10
0
-10
LCPI_US
LCPI_EU
LCPI_JA
LCPI_PH
Real Gross Domestic Product (LGDP)
1400
1200
1000
800
LGDP_US
600
LGDP_EU
400
LGDP_PH
200
0
LGDP_JA
RESULTS FROM ESTIMATION
Prior mean
Post. mean
May7
alpha1_PH
alpha2_PH
alpha3_PH
beta_fact_PH
beta1_PH
beta2_PH
beta3_PH
gamma1_PH
gamma2_PH
gamma4_PH
growth_PH_ss
lambda1_PH
lambda2_PH
lambda3_PH
lambda1_RS_PH
phi_PH
Pietar_PH_ss
rho_PH
rr_bar_PH_ss
tau_PH
beta_reergap_PH
chi_PH
0.75
0.1
0.5
0.15
0.65
0.15
0.15
0.75
1.1
0.5
5
0.5
0.4
0.05
0.5
0.6
/ 4.714
0.5
2 / 1.5
0.05
0.05
0.05
May31
0.755
0.114
0.500
0.283
0.559
0.132
0.137
0.783
0.938
0.442
4.817
0.568
0.350
0.083
0.370
0.669
0.412
2.128
0.047
0.047
0.051
0.180
0.573
0.106
0.129
0.867
0.768
0.521
4.993
0.580
0.580
0.105
0.465
0.670
4.684
0.488
1.471
0.048
0.041
0.050
RESULTS FROM ESTIMATION
Prior Mean
Post. Mean
May7
May31
standard deviation of shocks
RES_PIETAR_PH
RES_PIE_PH
RES_Y_PH
RES_RS_PH
RES_LGDP_BAR_PH
RES_G_PH
RES_RR_BAR_PH
RES_UNR_GAP_PH
RES_UNR_BAR_PH
RES_UNR_G_PH
RES_LZ_BAR_PH
RES_RR_DIFF_PH
RES_DOT_LZ_BAR_PH
0.25
3
0.5
0.6
0.2
0.1
0.2
0.6
0.1
0.1
5
1
0.1
0.192
3.079
0.544
1.016
0.295
0.116
0.318
0.853
0.133
0.089
7.331
0.972
0.079
0.138
3.307
0.695
0.429
0.155
0.144
0.143
0.2409
0.1086
0.257
0.100
6.669
0.652
0.085
correlation of shocks
RES_Y_PH,RES_G_PH
RES_LGDP_BAR_PH,RES_PIE_PH
0.25
0.1
GPM as of May 31, 2012