2 results
Search Results
Now showing 1 - 2 of 2
Item Restricted Assessing the output gap's risk in inflation targeting: a loss function approach(2009-03) Quiambao, Maureen Hizon; Tan, EditaOutput gap is the difference between the economy's actual output and potential output, potential output being the level of production that can be sustained with the existing labor, capital and given state of technology. Output gap is indicative of supply and demand pressures in the economy that can cause fluctuations in the inflation rates. Various countries have adopted the output gap as a reliable indicator of domestic inflationary pressures, citing that a positive output gap is indicative of demand pressures. In the Philippines, Josef Yap of P.I.D.S. and Bagsic and McNelis of the B.S.P., the Philippines' central bank, provided literature for output gap in the Philippine context. Yap suppmted the use of output gap in inflation targeting. Bagsic and McNelis found uncertainty in output gap estimation, albeit favoring its use. The findings of Yap and Bagsic and McNelis have placed an uncharted region to be discussed: if the output gap is indeed an indicator of inflationary pressure, what were the risks of the current monetary policy of the BSP, which is inflation targeting'? What was the output gap for the Philippines? A period loss function of an inflation targeting based central bank was employed in order to investigate this inquiry. Data on output gap, interest rate, inflation rate from the first quarter of 1990 to the third quarter of 2008 was used in the analysis. Three significant results were found in the pursuit of the inquiry. First, the output gap is a significant variable in predicting the future trend in inflation, which is vel)· helpful for the central bank to set their monetary)· targets. The interest model confirmed structural assumptions that the intercept, or the Taylor rule, would indeed dictate optimal stabilization policy. Second, the injection of output gap to the inflation model improved the equation suggesting the usefulness of including output gap in the inflation model using the Philippine data. However, since 2008, the risk of wrong monetary)· policy has risen significantly. The BSP has been inconsistent with its success in minimizing the cost of monetary policy. In the eight- year span of macroeconomic data, there are durations of high-risk of monetary policy, briefly touching the optimal policy rate and then threading high risk once more.Item Restricted The contribution of the output gap in the conduct of inflation targeting in the Philippines(2004-03) Angeles, Rj F.; Tan, Margot Aissa C.This paper evaluates whether the inclusion of the output gap in the central bank's estimated reaction function would improve the conduct of inflation targeting in the Philippines. A reduced-form vector autoregression model was constructed using the exchange rate, the output gap, inflation, and the interest rate as the relevant variables. The authors use two measures for the short-term interest rate, namely the RRP rate and the T -bill rate. Results from counterfactual simulations show that the adoption of a Taylor-type rule which involves the use of the output gap minimizes the deviations of inflation from its target. In particular, the output gap estimates derived from the Hodrick-Prescott Filter registered the lowest root mean square errors from the target. The models which correspond to the HP- filtered gaps yield simulated rates of inflation that outperform those which correspond to the gap estimates derived from the Unobservable Components method and the time trend model. Based on the empirical results of this study, the inclusion of the output gap is significant in terms of its contribution to maintaining inflation at a level that is nearer to the desired target. It is recommended that further studies consider the use of output gap estimates derived from other procedures, especially those which employ Markov-regime switching techniques which could account for shocks in the economy. In addition, the use of alternative model- representations for the Philippine economy within which counterfactual simulations may be performed is recommended as an area for future research.