Bangko Sentral ng Pilipinas

Objectives of the BSP’s
Macroeconometric
Modelling Efforts
 To construct a structural long-term annual macromodel of the Philippine economy that will serve as a quantitative tool of the BSP to forecast headline and core inflation rates one to two years in the future;
 To analyze the impact on headline and core inflation of key factors such as the exchange rate, world oil price, interest rates, wages, government borrowing and other relevant variables;
Bangko Sentral ng Pilipinas

Objectives…cont’d
 to determine the effectiveness of different channels and instruments of monetary policy, with special attention to the impact of changes in the BSP’s policy levers, namely, the short-term borrowing and lending rates
 to guide monetary authorities in their decision making process pertaining to the appropriate policies for the attainment of the BSP’s primary mandate of promoting price stability conducive to balanced and sustainable economic growth
Bangko Sentral ng Pilipinas

Main Characteristics of the
BSP MacroModel
 Partitions the Philippine economy into seven major blocs:
Price
Bloc
Expenditure
Bloc
BOP
Bloc
Monetary
Bloc
Production
Bloc
Labor
Bloc
Fiscal
Bloc
Bangko Sentral ng Pilipinas

Complete Version of the BSP
MacroModel
Count of Equations
BLOC Behavioral Identities Total
Expenditure
Monetary
Fiscal
Price
Labor
Production
BOP
TOTAL
4
12
9
9
1
1
2
38
10
11
6
6
3
1
3
40
19
20
11
18
4
2
5
78
Bangko Sentral ng Pilipinas

Bangko Sentral ng Pilipinas

UNEMP
RATE
LFPR
WAGES
PGDP
LF
NFIA
Employment
POPULATION
PRODUCTIVITY
GDPPROD
GNP GDP
CPIFUEL CPIRICE CPICORE
STOCKCAP
CPI
Consumption
ER POIL$
IMPLICIT
PRICE
DEFLATORS
TBILL91
RATE
M3
Reserve req’ts
OMO
Onite
RRP rate
LIBOR90
P/$ ER
Bangko Sentral ng Pilipinas
World Prices
Exports/Imports
BOP
X-M
GDPEXP
STAT
DISC
Investments
World Trade
Gap
CREDIT
PRIV/PUB
Budget
Govt
Rev/Exp
Govt

Main Characteristics…cont’d
 Provides more detail in the determination of prices in the economy
CPI = .1840 CPIFOOD + .0574 CPIFUEL
+ .7586 CPICORE
Bangko Sentral ng Pilipinas

Main Characteristics…cont’d
 Explicitly incorporates the BSP’s policy levers, namely:
 the overnight interest rate on RRP’s
 statutory reserve ratio requirements
 liquidity reserve ratio requirements
Bangko Sentral ng Pilipinas

Transmission Mechanism
BSP
Policy
Levers
Money
Multiplier
Base
Money
Core and
Headline
Inflation
Wages
Employment
Output
Bangko Sentral ng Pilipinas

Bangko Sentral ng Pilipinas

TBILL91
PGDP CPE
M3
RDEPOSIT
MM
GDP
RR
BOP
Budget
CPS
Public
Investment
Private
Investment
RLR
BSP Tbills
LDR
Bangko Sentral ng Pilipinas
NFABSP
Public
Credit
REGS
RESPOS
BM
RM
Private
Credit
RRPS
OMO
SDA
O-NITE
NDABSP
LIQRES
Other NDA
Others
Rest of
Priv Credits

Modelling the Transmission
Mechanism of Monetary Policy
1. RRPS/TD = ƒ{(RONIGHTRRP – RLENDING)**,
[DLOG(STOCKPRICE)]**, LIBOR90**, D96**,
D97**, Y2K**}
2. OMO = BBILLS + SDA + BSPTBILLS + RRPS +
OMOTHER
3. NDABSP = OMO + NGDEPOSIT + NDABSPOTHER
4. RM = NFABSP + NDABSP
Bangko Sentral ng Pilipinas

Modelling the Transmission Mechanism of
Monetary Policy, cont’d
5. BM = RM + LIQRES + REGS + RESPOSITION
6. MM = (1 + CDR) / (CDR + RDR + (CASHINVDMB
/ TD) + LDR + ((REGS + RESPOSITION) / TD))
7. M3 = MM*BM
8. TBILL91 = ƒ{[LOG(M3(-1)/PCPI(-1)/100)]*,
LOG(GDP), [(DLOG(PCPI)*100)]**,
RONIGHTRRP**, LIBOR90**, BALNG_NEW**}
Bangko Sentral ng Pilipinas

Modelling the Transmission Mechanism of
Monetary Policy, cont’d
9. LOG(IP) = ƒ{DLOG(GDP(-1)**, [(TBILL91 (-1) – PCPIINF(-1)]*,
BOPCAPBALN$(-1)**, (CREDITPRIV/PGDP)**, (ER/PGDP)**}
10. COMPNAGRIPCT = {UNEMPRATE**, PGDPINF(-1)*}
COMPNAGRI = COMPNAGRI(-1)*(1 + (COMPNAGRIPCT/100))
11. DLOG(PIFC) = ƒ{DLOG(PMCAP)**, [BALNG_NEW(-1)/GDPN(-
1)]**, [DLOG(PGDP(-1)]**, (TBILL91-PGDPINF)**,
DLOG(PCPIFUEL)**, D99**}
12. DLOG(PGDP) = ƒ{[DLOG(COMPNAGRI*NEMPFTE/GDP)]**,
DLOG(PIFC*KAPITAL/GDP)**, LOG(ER*POIL$*MFUEL/GDP)**,
D84**, D92**}
Bangko Sentral ng Pilipinas

In-Sample Forecasting
Performance of the Model
Statistics used:
Mean absolute error:
MAE = (1/n)   P - A 
Mean absolute percent error:
MAPE = (1/n)   (P – A)/A  *100 where:
A = actual value
P = predicted or simulated by the model n = number of periods covered by the simulation.
Bangko Sentral ng Pilipinas

Error Statistics
Static Simulation, 1988-2001
MAPE MAE
Base Money
Wage (COMPNAGRI)
Private Consumption
GDP
Total Investment
Imports
M3
Exports
GDP Implicit Price Index
91-day T-bill
Inflation Rate
Unemployment Rate
5.0
1.8
4.4
2.8
3.8
2.5
1.0
1.2
1.6
0.8
1.2
0.7
Bangko Sentral ng Pilipinas

 Impact of a sustained one-percentage point shock the RRP Rate
 Impact of a sustained one-percentage point reduction in the volume of trade
Bangko Sentral ng Pilipinas

Impact of a Sustained One-Percentage Point Shock in the RRP Rate: Change Relative to Baseline
0.4
-
0.0
-0.4
-0.8
-1.2
-1.6
90 91 92 93 94 95 96 97 98 99 00 01
GDP growth
Inflation (percentage point)
M3
Investment
Tbill 91-day (percentage point)
Bangko Sentral ng Pilipinas

Impact of a Sustained One-Percentage Point Reduction
Impact of a Sustained One Percentage Point Decease in the in the Volume of Trade: Change Relative to Baseline
0.4
-
0.0
-0.4
-0.8
-1.2
-1.6
90 91 92 93 94 95 96 97 98 99 00 01
Exports of goods
GDP growth
Inflation (percentage point)
Investment
Bangko Sentral ng Pilipinas

Website: www.bsp.gov.ph
E-mail: bspmail@bsp.gov.ph
Bangko Sentral ng Pilipinas