Determinants of short-term interest rates in the Philippines : (an application of sargent's loanable funds model)
This paper investigates the effect of government deficit, inflation expectations, change in money supply, level of income, and the changes in the level of income, to the level of nominal short-term interest rates in the Philippines. Sargent's Loanable Funds Model was used as the initial model f...
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| Format: | text |
| Language: | English |
| Published: |
Animo Repository
1999
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| Subjects: | |
| Online Access: | https://animorepository.dlsu.edu.ph/etd_masteral/1997 |
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| Institution: | De La Salle University |
| Language: | English |
| Summary: | This paper investigates the effect of government deficit, inflation expectations, change in money supply, level of income, and the changes in the level of income, to the level of nominal short-term interest rates in the Philippines. Sargent's Loanable Funds Model was used as the initial model for interest rates in the Philippines. Using unit root test and cointegration studies, inflation expectations and government deficits appeared to be the long-run determinants of interest rates. Test for structural breaks using Chow's test revealed that there was no structural break in the year 1986, which was believed to be the turning point for interest rate liberalization in the country. The study also showed that uncertainty, represented by a dummy variable, played a significant part in the movement of interest rates. To determine the effect of expectations on interest rate, an adaptive expectations model was used, where interest rate expectation is expressed as a distributed lag of the current rate. The exercise revealed that a one quarter lag on interest rate, inflationary expectations and uncertainty were the main determinants of short-term interest rate in the Philippines. |
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