A nonlinear ARDL model of inflation dynamics in the Philippine economy

Abstract

This study investigated whether global oil price changes, exchange rate, interest rate, and economic output exert symmetric or asymmetric pass-through effects on inflation in the Philippines. A Nonlinear Autoregressive Distributed Lag (NARDL) model was fitted to the observable data using quarterly observations from 1998 to 2019. Knowledge of these relationships is important in monetary policy setting in achieving targeted inflation; the Philippines adopted inflation targeting in 2002. The finding shows that world oil price shocks are still prominent and the most important determinants of inflation variations in the country. There is prima facie evidence on the short-run asymmetry of oil price changes to inflation. Exchange rate pass-through to inflation was very minimal in the short-run, and there is no long-run effect. Evidence that interest rate and demand shocks have a long-run asymmetric effect on inflation was found. These findings imply that monetary policy setting should account for the asymmetric effects of inflation determinants. Study results provide a deeper understanding of how positive and negative changes of inflation determinants affect actual inflation, which aids policymakers in achieving targeted inflation.