IDEAS home Printed from
   My bibliography  Save this article

Monetary transmission mechanism in the Philippines : the interest rate channel


  • Francisco G. Dakila, Jr.
  • Ma. Digna G. Paraso

    (Bangko Sentral ng Pilipinas)


The transmission mechanism of monetary policy explains how monetary policy works—that is, how economic and financial variables respond to monetary policy actions. In view of the complexity of the transmission process, properly identifying the process as it works in the Philippines requires considerable effort and volume of work. In the context of inflation targeting, for example, an understanding of the monetary policy transmission mechanism is essential to understanding what monetary policy can and should do and at what point in time actions should be undertaken to contain or offset disturbances that could threaten the achievement of the inflation target. In this paper, we concentrate on the interest rate channel. We present initial estimates, obtained from general-to-specific modeling, and validate the results using a vector error correction model. The results confirm expectations that an increase in the 91-day Tbill rate generates a lagged reduction in the level of fixed capital formation and a decline in GDP growth, which is strongest about four quarters after the interest rate shock. However, the results also show that there is likewise an initial increase in the inflation rate; by the eighth quarter, however, inflation falls below the baseline. We view our results as an initial step in a research program that seeks to specify the various channels of monetary policy impact.

Suggested Citation

  • Francisco G. Dakila, Jr. & Ma. Digna G. Paraso, 2005. "Monetary transmission mechanism in the Philippines : the interest rate channel," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 42(1), pages 55-80, June.
  • Handle: RePEc:phs:prejrn:v:42:y:2005:i:1:p:55-80

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
    2. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
    3. Gruen, David & Romalis, John & Chandra, Naveen, 1999. "The Lags of Monetary Policy," The Economic Record, The Economic Society of Australia, vol. 75(230), pages 280-294, September.
    Full references (including those not matched with items on IDEAS)

    More about this item


    inflation targeting; interest rate; monetary policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:phs:prejrn:v:42:y:2005:i:1:p:55-80. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reuben T. Campos). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.