This study assesses the usefulness of money for policy in the Philippines. The basic
idea behind the use of monetary aggregates for policy is that observed fluctuations in
money anticipate movements in the ultimate objective of monetary policy, such as
inflation control. The stability of key empirical relationships, including the behavior of
velocity and the presence of cointegrating relationships among money and variables of
interest to policymakers are examined. In general, results indicate that the stability of
the behavior of velocity and the presence of cointegrating relationships involving money
and other variables of interest do not do much damage to the potential usefulness of
money for policy. The ability of money to predict inflation is examined using Granger
causality tests and an unrestricted VAR that examined the relative contribution of
innovations in money to the variance of the forecast errors in inflation. In general,
money’s ability to predict inflation is less clear-cut and seems to be dependent on the
ordering and lag lengths of the variables used in the VAR and the definition of money
used.
