(DP 1996-03) Lags in Monetory Policy in the Philippines

Cayetano W. Paderanga, Jr., Jose Antonio Tan III

Abstract


Friedman(1960-1963), using his and Anna Schwartz's study of monetary movements and the business cycles studied by the National Bureau of Economic Reseach (NBER) concluded that "monetary changes have their effect only after a considerable lag and over a long period and that the lag is rather variable (Friedman,1960)." This paper studies whether such proposition holds for Philippines by examining the optimal length of monetary policy lags in the Philippine economy. A polynomial distributed lag structure is specified for M3 to arrive at estimates for the lagged effects of money on prices, output and interest rates. For the Philippines, the optimal lag length of the effect of M3 on consumer prices is found to be 6 months. The lagged effects of M3 on nominal GDP, real GDP and the 91-day Treasury Bill rate are estimated to be 4 quarters, 9 quarters and 5 months, respectively.

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