The sensitivity of Philippine interest rates to the US federal funds rate
Date
2006-10
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Abstract
The sensitivity of Philippine interest rates to US interest rate hikes is the main focus of this paper. The US Federal funds rate, among others, is closely monitored by the Bangko Sentral ng Pilipinas and other central banks in the world. This is because the Federal funds rate indicates any tightness in the US banking sector that factors in US monetary policy stance. This paper investigates whether a long-run relationship exists between the different Philippine domestic interest rates and the Federal funds rate. Results from the cointegration tests suggest that there is a long-run relationship among the four domestic interest rates (ORP, ORRP, IBCLR and TBILL364) and the explanatory variables, the federal funds rate and the inflation differential.
It also estimates the speed of adjustment for each domestic interest rate. Compared to Frankel's [2002] result, the results suggest that domestic interest rates adjust faster to changes in the US federal funds rate. The calculated half-life in this study is less than that calculated by Frankel and others. This leads us to the conclusion that domestic interest rates adjust more quickly to changes in the federal funds rate than to changes in the 3-month US Treasury bill rate.
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Keywords
Federal interest rate, Interest rates, Interest, US Federal, Monetary policy, Exchange rate