(DP 2005-08) An Assessment of the Usefulness of Money for Policy in the Philippines

Abstract

This study assesses the usefulness of money for policy in the Philippines. The basic idea behind the use of monetary aggregates for policy is that observed fluctuations in money anticipate movements in the ultimate objective of monetary policy, such as inflation control. The stability of key empirical relationships, including the behavior of velocity and the presence of cointegrating relationships among money and variables of interest to policymakers are examined. In general, results indicate that the stability of the behavior of velocity and the presence of cointegrating relationships involving money and other variables of interest do not do much damage to the potential usefulness of money for policy. The ability of money to predict inflation is examined using Granger causality tests and an unrestricted VAR that examined the relative contribution of innovations in money to the variance of the forecast errors in inflation. In general, money’s ability to predict inflation is less clear-cut and seems to be dependent on the ordering and lag lengths of the variables used in the VAR and the definition of money used. *The author wishes to thank the sponsors and participants of the Asian Economic Panel Meeting held in March 2005 in Tokyo, Japan and Carlos C. Bautista for research assistance.