The Response of Inflation and Other Macroeconomic Variables to Global Rice Price Shocks: A Structural Vector Autoregressive (SVAR) Analysis

Abstract

No basic good is more politically sensitive for the Philippine government and more important to the Filipino diet than rice, overshadowing other staple crops of precolonial Philippine societies such as yam and taro. This means that both the government and the Filipino public at large see the importance of maintaining price stability of basic goods. One way that the Bangko Sentral ng Pilipinas’ (BSP) ensures price stability is using inflation targeting, wherein it announces a target range of inflation rates that the country needs to achieve to maintain price stability. Relative to those in developed economies, monetary policies in developing economies, including the Philippines are also not as extensively studied. With all these things in mind, this paper aims to fill in a research gap and contribute to literature by analyzing using SVAR the response of inflation to global rice price shocks covering the years 2002 to 2018. The authors found that there is indeed an increase in inflation whenever positive shocks in global rice prices occur. Other findings include the decrease in output and the depreciation of the Philippine peso whenever there are global rice price shocks. This paper suggests ways to insulate the Philippines from GRP volatility such as increasing mechanization of Philippine agriculture; promoting of the production and consumption of more-climate resilient crops such as cassava, saba banana, taro, yam, and sweet potato; and shortening the gap between GRP shocks and RRP increases.

Keywords: Inflation, monetary policy, Philippines, rice, structural vector autoregression