The Bangko Sentral’s structural long-term inflation forecasting model for the Philippines

Because of the forward-looking nature of inflation targeting, successful implementation of the framework entails good forecasting ability for the monetary authorities. Toward this end, the BSP has exerted considerable efforts at developing its econometric models. In order to provide monetary authorities with a clearer indication of the outlook on inflation over the policy horizon of two years, the BSP has been developing an annual macroeconomic model for inflation forecasting and policy analysis. The objective of the project is to provide the BSP a quantitative tool to forecast headline and core inflation rates one to two years into the future; to analyze the impact on headline and core inflation of key factors such as the exchange rate, world oil price, interest rates, wages, government borrowing and other relevant variables; to determine the effectiveness of different channels and instruments of monetary policy, with special attention to the impact of changes in the BSP’s short-term borrowing and lending rates, which are the BSP’s policy levers; and to guide the monetary authorities in their decision making process pertaining to the appropriate policies for the attainment of the BSP’s primary mandate of promoting price stability conducive to balanced and sustainable economic growth.