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

  • Cruz, Christopher John
  • Mapa, Dennis

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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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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  1. Schwert, G William, 2002. "Tests for Unit Roots: A Monte Carlo Investigation," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 5-17, January.
  2. Kaminsky, Graciela & Lizondo, Saul & Reinhart, Carmen M., 1997. "Leading indicators of currency crises," Policy Research Working Paper Series 1852, The World Bank.
  3. Bussière, Matthieu & Fratzscher, Marcel, 2002. "Towards a new early warning system of financial crises," Working Paper Series 0145, European Central Bank.
  4. Amisano, Gianni & Fagan, Gabriel, 2010. "Money growth and inflation: a regime switching approach," Working Paper Series 1207, European Central Bank.
  5. Hali J. Edison, 2000. "Do indicators of financial crises work? an evaluation of an early warning system," International Finance Discussion Papers 675, Board of Governors of the Federal Reserve System (U.S.).
  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. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
  9. Tamás Bartus, 2005. "Estimation of marginal effects using margeff," Stata Journal, StataCorp LP, vol. 5(3), pages 309-329, September.
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