Philippines: BSP shifting to new forecasting model

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The Bangko Sentral ng Pilipinas (BSP) is targeting to transition to a new forecasting model next year to enhance its forward-looking projections and aid in the monetary policy decision-making process.

Dennis Bautista, director of the BSP's Department of Economic Research, said in a media information session that the central bank aims to adopt the Policy Analysis Model for the Philippines (PAMPh) as its workhorse model in 2025 for medium-term forecasting and policy analysis.

'PAMPH brings best-policy formulation in line with best practice in inflation-targeting central banks. It includes key economic blocks that allow for systematic, internally consistent, and economically coherent analysis of current and future economic conditions,' Bautista said.

Bautista said PAMPh captures several transmission channels, including interest rate, exchange rate, expectations and credit. It also supports a communication of forward guidance, risks, and policy trade-offs to help anchor inflation expectations.

According to the BSP, the PAMPh is a monetary policy model for a small open economy like the Philippines.

It is a semi structural gap model based on New Keynesian foundations with a general equilibrium framework and forward-looking features that allow for the assessment of the dynamic path of key macroeconomic variables in a theoretically consistent manner.

The BSP underwent a two-year technical assistance mission with the Institute for Capacity Development of the International Monetary Fund to further improve the structural features and forecasting performance of the PAMPh.

The BSP currently has two workhorse models namely the multi-equation model (MEM) and the single equation model, which are used to capture the impact of main monetary policy transmission channels of inflation.

BSP Deputy Governor Francisco Dakila Jr. said the MEM has a good batting average and has lower errors. However the PAMPH is a bigger tool than the MEM.

'In doing the analysis of what's driving inflation and if there are any imbalances in other sectors of the economy, the multi-equation model really just consists of around 24 equations,' he said. 'PAMPh has 290 equations. It's more complex.'

Dakila said the BSP would keep on using the MEM, but it will no longer be the baseline model.

Instead, he explained that the MEM would be one of the central bank's satellite models where it can provide more details on inflation on a higher frequency basis.