Interest Rate Movements and Inflation Risk in the Philippines

Abstract

This article examines the role of inflation risk in the determination of interest rate movements in the Philippines. The analysis proceeds by first estimating a measure of inflation risk that is analytically derived from the consumption-based capital asset pricing model (CCAPM). This inflation risk measure, the covariance of purchasing power growth and consumption growth, is estimated using a multivariate GARCH method on quarterly Philippine data from 1986 to 2005. The estimated inflation risk series is then used in a CCAPM-based interest rate model to help explain interest rate movements in the Philippines.