Philippine Standard time

Distributional Impact of Monetary Policy: Evidence from The Philippines

With the advent of unconventional policies implemented by the central banks in advanced economies, a resurgence of interest in the role of monetary policy in driving inequality has ensued. This research mainly focused on examining how the variations in the Bangko Sentral ng Pilipinas' policy rate affect income across Filipino households, and consequently, income inequality. The study first employed a VAR model to check the general direction of how variation in output growth, inflation, and policy rates affect income inequality as measured by the GINI coefficient. The impulse response functions suggest that expansionary monetary policy could potentially reduce income inequality in the country. Moreover, a positive shock to output reduces inequality, while a positive shock to inflation drives higher inequality. Subsequently, the paper employed quantile regressions to characterize how variation in the BSP's policy rate affects income across income groups. The regression analyses yielded a significant impact of policy rates on income at varying magnitude across household groups. While all income groups recorded a negative association between income and policy rates, the wealthier households bear the substantial negative effects. Also, the quantile regressions highlight the negative association between inflation and total income across all household groups. In particular, the poorest households are hit the hardest following an inflationary episode. This is consistent with the paper's preliminary assessment, which noted the inequality-worsening effect of a positive shock to inflation. These results suggest that the inflation channel is an essential distributional channel of monetary policy in the Philippines, and keeping inflation within target benefits the poor the most.


This publication has been cited time(s).