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Inflation Dynamics and the Money Supply in the Philippines: Evidence Using a Standard Vector Error Correction Model

This paper examines the relationship between money supply and inflation in the Philippines through a monetarist lens, assessing the impact of monetary policy on inflation using contemporary macroeconomic data. Using the Vector Error Correction Model (VECM) and impulse response function (IRF), the results suggest that increases in the money supply led to higher inflation rates, with a delayed effect, highlighting the risks of expansionary monetary policies. To mitigate these risks, the study recommends adopting a rule-based monetary policy framework where money supply growth is indexed to economic growth. This approach aims to enhance the transparency and credibility of the Bangko Sentral ng Pilipinas (BSP), moderate money market growth, and stabilize inflation and economic growth. Additionally, the study recommends strengthening efforts to cultivate fiscal discipline towards the aim of fiscal consolidation. Policymakers should focus on moderating the national budget, improving tax efficiency, or broadening the tax base to fund expenditures. Strengthening fiscal discipline is crucial for managing inflation and reducing stagflation risks. Furthermore, a disciplined and coordinated approach to monetary and fiscal policy is essential for achieving price stability and sustainable economic growth. This strategy can significantly enhance the BSP's effectiveness in controlling inflation and supporting long-term economic stability.


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