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An Early Warning System for Inflation in the Philippines Using Markov-Switching and Logistic Regression Models

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  • Cruz, Christopher John
  • Mapa, Dennis

Abstract

With the adoption of the Bangko Sentral ng Pilipinas (BSP) of the Inflation Targeting (IT) framework in 2002, average inflation went down in the past decade from historical average. However, the BSP’s inflation targets were breached several times since 2002. Against this backdrop, this paper develops an early warning system (EWS) model for predicting the occurrence of high inflation in the Philippines. Episodes of high and low inflation were identified using Markov-switching models. Using the outcomes of regime classification, logistic regression models are then estimated with the objective of quantifying the possibility of the occurrence of high inflation episodes. Empirical results show that the proposed EWS model has some potential as a complementary tool in the BSP’s monetary policy formulation based on the in-sample and out-of sample forecasting performance.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 50078.

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Date of creation: 2013
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Handle: RePEc:pra:mprapa:50078

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Keywords: Inflation Targeting; Markov Switching Models; Early Warning System;

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  1. Graciela Laura Kaminsky, 1997. "Leading Indicators of Currency Crises," IMF Working Papers 97/79, International Monetary Fund.
  2. Schwert, G William, 2002. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(1), pages 5-17, January.
  3. Tamás Bartus, 2005. "Estimation of marginal effects using margeff," Stata Journal, StataCorp LP, StataCorp LP, vol. 5(3), pages 309-329, September.
  4. Bussiere, Matthieu & Fratzscher, Marcel, 2006. "Towards a new early warning system of financial crises," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(6), pages 953-973, October.
  5. Hali J. Edison, 2003. "Do indicators of financial crises work? An evaluation of an early warning system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 8(1), pages 11-53.
  6. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  7. Martin Evans & Paul Wachtel, 1993. "Inflation regimes and the sources of inflation uncertainty," Proceedings, Federal Reserve Bank of Cleveland, pages 475-520.
  8. Amisano, Gianni & Fagan, Gabriel, 2010. "Money growth and inflation: a regime switching approach," Working Paper Series 1207, European Central Bank.
  9. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, Elsevier, vol. 45(1-2), pages 39-70.
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