Received: 11 May 2020 , Published: 23 May 2020
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|1||Erick John E. Endres|
The paper examines the relationship between interest rate and inflation in the Philippines using 204 monthly observations from January 2003 to December 2019. The variables were tested using Vector Autoregression, Granger Causality, Impulse Response Function, Cholesky Variance Decomposition, Johansen Cointegration, and Vector Error Correction. The results confirmed the existence of Fisher Effect and a unidirectional causality function to interest rate from inflation. The immediate response of interest rate to a positive standard deviation shock to inflation was recorded in the second period and inflation accounts for a periodic average of 4.72% forecast error variance of interest rate in the short run. The empirical analysis also validated the existence of significant positive short-run and long-run relationship between the two variables.
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