Simple interest rate rule and its application in the Philippine monetary policy
Date
2009-11
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Abstract
This study tests the assumptions made in the Taylor Rule and the consistency of the rule when it is applied in the context of the Philippines. An OLS regression will be done by using historical data on overnight reverse repurchase rates, inflation rate, output gap, and unemployment rates. Aside from the original form of the Taylor rule, another alternative model called a Taylor-type rule was used to make a more realistic policy framework. This model will be using lagged values of inflation, output gap, and unemployment, while other variables such as the exchange rate and the Fed Funds Rate will be added. The paper uses two measures of inflation, the CPI inflation and core inflation, to see if there is any significant difference.
The results show that even though the estimates vary from the original rule, the regression still follows a similar path from the actual path of the interest rule. Using two kinds of measure for inflation show significant difference in the coefficients; although figures show that there is a small difference when using two measures. As a substitute for output gap, the unemployment rate is significant in describing the country's reaction function.
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Keywords
Interest rate, Monetary policy, Interest, Interest rate rule, Philippine economy