A Review and Synthesis of Macroeconomic Models of the Philippines

PhilippineDevelopmentStudies Series Working Paper 7902 A REVIEW AND _SIS OF MACROECONCNICMODELS OF THE PHILIPPINES

July 1979 PhilippineInstitutefor DevelopmentStudies

PID$ Library

IIllfJliOl The views e_pressed in this study are those of the author and do not necessarilyreflect those Of the Institute.

TABLE

OF

CONTENTS

PAGE

i.

Introduction

2.

Foreign 2.1 2.2 2.3

.........................

Assistance

2

Chenery-Strout Model ............. Shibuya-Yamashita Model .......... Fei-Paauw-Cookson Model ..........

2 9 II

The

4.

Narasimham-Sabater

5.

The

World

Bank

Model ..................... Model ..................

Output Determination ............. Exports ......................... Imports .......................... Sectoral Prices .................. Projection Results ............... Comments on the NarasimhamSabater Model ....................

UNCTAD 5.1 5.2

22

24 27

Macroeconomic

7.

The

Encarnacion

Projection

_{odel ...... Model---

28

......

33

The Basic Model .................. The Monetary Submodel ............ The Foreign Trade Submodel ....... The Production Submode! .......... The Government Submodel .......... Projection Results .... --- ........ Comments on the Encarnacion Model .............................

36 37 40 43 46 48

Villanueva 8oi 8.2 8.3

17 19 20 21 21

Model Features ................... Comments on the UNCTAD Model .....

Encarnacion

The

17

23

The

8.

13

Model .........................

6.

7,1 7.2 7.3 7.4 7.5 7.6 7.7

I

Models ..... - ..........

3,

4.1 4.2 4.3 4.4 4.5 4.6

....

_odel .....................

The Real Sector .................. The Financial Sector _............ Comments on the Villanueva Model ............................

49 50 51 52 55

PAGE

9.

The

Zialcita-Alfiler 9.1 9,2 9.3

I0.

The

Ii.

Summary

Model ...............

Real Sector ...................... Monetary Sector .................. Comments on the ZialcitaAlfiler Model ....................

BACHUE

57 58 59 60

Model .........................

62

Remarks ..........................

68

Bibliography

.............................

77

A Rz_VlE_N_D SYNTF_SIS OF _4AC.ROECOI'_D!_TRIC __,©DELS OF RIlEPHILIPPINES

by Virgilio T. Velasco*

i.

Introduction This

report

models

that

review

is

had

been

intended

model-building of

a model

of the macro

models

the

School

tion

of

eight

been

for

1972-76

used

and

consisting

model

for been

University

of

identities° 62.structural

use.

was

used

The

associates the

model

It was

later

mainly

of

expanded 17 identities

model

Neither

was

prepara-

consisted

equations,

planning.

Philippines

in the

macroeconomic

This

1965.

models° his

plano

to

after

and

that

The

development

is confined

sectoral

the

model

to

the

Encarnacion

development put

development

Philippines

or

The

econometric

the

survey

development

of

for

The

of

three

into

planning

industry J°

Philippines°

for

relationships.

again

way

the

of Economics

4 assumed

expanded

economy.

Professor

equations

a model

and

the

be used

macroeconometric

the

to pave

a macroeconomic the

for

insights

include

1971,

developed

developed

developed

not

the various

to give

t.hat can

In

to

and

Philippine

It does

at

reviews

has

has due

to

not

the doubts

z

Dr. Virlio T. Velasco is a senior lecturer of the School of Economics of the University of the Philippines and consultant to a number of private companies and government agencies in the Philippines°

a

cast

on

the

ability

relationships policies

in

adopted

structural able

used

overall and

for

the

New

in

the

economy

rer°

in estimating

economy

Society

the

that

1972.

have

the

the

use

describe

after

may

model

making

caused

models

were

national

not

income

equations of

The

underwent

the models

difficult

impractical.

and

the

National

Institute

(PIDS),

has

funded

based

econometric

step

in developing to review

Foreign

been

a research model

and

assistance

and

the

feasi-

policies_

(NED.A)_

Development

Studies

to develop As

a computera first

commissioned

macro-econometric

the models

to dsteo

Models

and

(broadly

for

test

Philippines,

Chenery-Strout

designed

Authority

a model., P[DS

formulated

Chenery framework

the

to

plans

project

synthesize

Assistance 2.1

of

such

a model

government

Development

Philippine

have

of

for

Economic

the

author

need

consistency

through

2o

to accurately

In addition,

revisions.thus

bility

that

model

Philippine

•Realizing

the

the

the

shifts

to provide

series

of

to

Strout

Models

(Z) formulated

analyze

defined

the as

the

effects net

a. theoretical of foreign

inflow

of

foreign

3

capital

-- public

investment)

on

less

developed

the

Philippines.

the

the

foreign

exchange.

limited

capacity

A low

to

foreign

equipment,

to

organizational

skills,

proceeds

as

to

Foreign

adding

changing

Chenery-Strout highest

resources make

their

model rate

of imported

export

resources of

relieve

economic

the

to supplement use

more

postulates

permitted

it

and

demands

can

supply

growth,

and

these

assistance

and

The

increasehuman saving

of

country's

other

sustained

allocate the

external

resources

at the

achieve

domestic

in meetin_

development.

The

To

as well

importation

materials,

simultaneously

as well

available

raw

labor,

the

the

that and

levels

limits

constrains

is necessary

by

savings

to

exchange

services.

necks

skilled

undertakings.

goods

efficiently

of

factors

of production limits

was

savings,

investment

and

earnings,

set

of

the

study

three

finance

machinery and

rate

out

supplies inputs

Among

in their

-- skills,

potential

as private

development.

single

process

other

market

as well

included

Limited

and

loans

of

Strout

growth

investment.

of

process

and

entrepreneurs, as

and

countries

Chenery constrain

grants

by

bottlelocally

efficient.

that the

growth

most

4

limiting (I) an on

and

the

balance

assistance ability

and

the

the

export

recognized:

with

resource

limits

limited

growth

constraint

growth

is binding.

situation,

to close

capital

are

(2) a trade

ability.

minimum

the

foreign

gap

In the

In

between

trade

investment

limited

inflow

should

be

large

gap between

import

requirements

growth

enough

to

and

earnings.

The

model

or expensive aid

and

required

saving

situation,

growth

of payments limited

is

situations

limited

savings;

investment

cover

Two

investment

skills

when the

factor.

merely

obtainin_ maximize

assumes

that for

an

the

that

recipient

consumption

increase

consumption

aid

country

(that

in GNP)

is sufficiently

the

Output

is determined

by

of

incremental

not

is, without

and

until

will

that

target

limited increase

also

it seeks growth

to

rate

is

achieved.

by way

tradition developing

the

capital

of Harrod-Domar. country

a significant

where

limitation.

output

relationship.

supply

of

skilled

the

amount output

This

investment

ratio,

supply

Equation

The

of

is plausible

total

Investment inputs.

the

is skill

of

in a labor

is not

the

capital-

(I) gives constrained limit

in the

by

parameter

the B

in (2) reflects productive marginal

the skill required

capacity.

The savings

savings rate

GNP is specified

(4).

limit is based on the

A target rate of growth

Exports

are assumed

for

to grow at

constant

rate

required

to sustain a given level of GNP, arising from

the

(S).

(3).

to increase

relatively

investment

Imports have a minimum

inelastic

demand for intermediate

goods currently

A country ment, depending the savings

goes through several phases on which

limits prevail.

The increase

of develop-

In Phase I,

and inequality

(3) becomes

in GNP is limited by the

ability to invest.

CHENERY-STROUT

BASIC _ODEL

t-I =

Yo

+ k I- Z IT T=O

I where k =

(I)

Yt

(2)

it i (1 + B) It_ 1

(3)

S t i St= SO + e(Yt-Y o)

(4)

Yt

< (1 + r)

and

imported.

limit is effective

an equality.

level (6)

Yt-1

_I

t-I

6

(S)

Xt ;

(6)

Mt L gt

Endogeneous

X0

(1 + g)t

= No + m (Yt-Yo)

Variables:

Yt

= gross

national

product

I t = gross

investment

S t _ gross

domestic

gt

= potential

Mt

= imports

gross of

Mt = required Xt = exports Ft

= net

savings domestic

goods

imports of

inflow

of

goods of

and

savin_s

services goods

and

foreign

and

services

services capital

Parameters:

k

= incremental

8

= maximum

a

= marginal

r

= target rate of growth of GNP

g

= rate of growth of exports

m

= marginal

External

assistance

investment

gross capital-output

ratio

rate of growth of investment savings rate

import

rate

fills the gap

and thepotential

(It-_t) between

saving limit.

When

investment rate

of

reaches

growth

Inequality

of

GNP,

i ends

effective

(I) and

to sustain

sufficient

Phase

(4) becomes

restriction. required

a level

at

and

and

(4) together

growth

to sustain Phase

the

(2) as

the

target

target

II begins.

replaces

give

the

a

investment

rate:

It = krY t

The

gap

Phase

between

I and

tions.

It and

Phase

II are

It

is hoped

to increase

savings

ment-savings

gap.

rate by

growth

neither

the

requirements

equal

the

are in

inflow (Mt-Et)

to

growth

government

policies

will

time

the

and

eliminate

situabe

the

by marginal

investment

I

and

Phase

path

nor

the

affected

imports

desired

(6_ means

required

Phase

growth

adjustment

assistance.

limited

is achieved

above

external

investment

in due This

by

rate

able

invest-

saving kr

required

target.

In both

in

that

a sufficiently

the

St is bridged

there

sustain

between

and

it is assumed

foreign

assistance

the

continual

exports

to make

investment-saving

that

Ft should

by

II,

be

gap.

is a minimum level

of

able

cover

the

import

to

requirements

process

GNP.

trade

The

inequality

level The

minimum

and

of

the

import

a given

that

export

_sp

Mt

capital gap earnings.

8

When

the

capital

inflow

saving

gap becomes

saving

limits

inflow

of

by

trade

the

limited

of

or

exceed

external

parameters

of

would

be

1964,

relying that

parameters

in

of

the

In particular,

0.3 was

import

for

of

The in its

high

.01 was

and

planning

of

and would

rate

1962-67,

were

marginal

the

not

propensity

to

propensity

low.

Chenery-Strout

orientation.

the

growth

for

marginal

minimal

g, and

Mangahas

data

the

B, =,

savings-investment

Philippines

the

to

extreme-

of GNP,

target

unrealistically

significance

k,

assistance.

the

is set

in 1963-64

and

using

(6) become

the

for

II!

the

external

retrospect,

derived

realistic.

sustain

(2) and

gap.

using

trade

of trade

Limits

inflow

growth

in Phase both

and on

target

controlled

(4) and

Chenery-Strout

to eliminate

after

showed

showed

the

the

one

IIl.

capital

that

able

lies

Phase

gap,

and

becomes

Inequalities

a 5 percent

trade

becomes

situation

[13]

without

to

GNP

Mangahas

Philippines

save

of

trade

specifying

investment-

to be binding,

is called

the

the

the minimum

growth The

by

the minimum

value

gaps

and

and

and

than

ceases

redundant.

equalities,

be

(3)

limit.

(3) become

equal

less

capital

growth

determined

In fact,

model the model

9

has

been

formulated

Chenery

and

optimal

planning

forerunner in the

MacEwan

of

of

Bank

development.

and

data to

assistance

to

Philippine

economy

in the from

in

the

future.

the

foreign

as

is postulated

variable.

As Mangahas

no

foreign

use

a foreign using The

of The

odds

foreign

authors

concluded

dependent

remain with

model

on

so for the

that

foreign

some

time

conclusions

model.

model

excess

an

and

in

a

organizations.

parameters.

and will

the

as

are

Philippines,

heavily

is at

investment

be

was

Shibuya-Yamashita

capital

that

contribution

Chenery-Strout

The

for

is also

presented

growth.

past

This

[19]

model

the

economic

models

postwar

derive

estimate

by

Model

the

to

assistance

It

for

model

international

Yamashita

model

1950-1954

the

other

form

of analysis

The

two-gap

Shibuya-Yamashita

assistance

used

programming

[ 5 ] as a tool

Shibuya.and

was

linear

so-called

World

2.2

in

of

defines imports

import

explanatory functions,

theoretical

basis

capital

in these

[13] for

net over

variable along

points

inclusion

functions.

the

there

of net Thus,

no

of

exports.

of the

with

out,

inflow

gross

GNP

seems

to

inflow

of

a priori

I0

expectations can

be

on

sign

and

magnitude

of

its

coe__ficients

deduced.

GNP

is determined

population. value

Private

and

on GNP.

government to

the

of

national inflow

investment

of

of

equations capital

capital

in the pointing

ment

by

induced not

only

to

current

in

model

the the

the

doubt

the

conclusion case.

assumed

the

can

defithe

of net

be

solved.

coefficients

of and

net

import

the multiplier

investment

stock.

of

Mangahas

analytical

of

equation

growth

in the

high

for

to capital,

indefinite

of

lagged

are

Using

investment

capital

of

its

definition

a mis-specification

cast

Philippine

the

reduced-form

a mis-interpretation

in the

the

and

is given

terms.

In addition,

also

on

and

on

Exports

increment

data,

are negative째 stock

formulation

the

Philippine

is positive,

scores

as

stock

is based

in absolute

capital,

foreign

capital

expenditures.

identity,

foreign

Using inflow

A similar

linearly

income

gross

consumption

consumption

increase

nition

by

model

results

dependence

investunderbut

that on

aid

Ii

2.3

Fei-Paauw-Cookson

Fei the

gap

and

between

savings. output

GNP

income

A per

rate

The

paths

average

by

are:

(I)

exceed

value

(2) the

be

exceed

by

service

capita

are

assumed.

and

of

GNP

arising

requirements.

The

average

is '

finite inflows

ratio

must

savings

rate;

domestic

savings

capacity,

marginal

savings

ratio,

eventually by

gap

for

capital

savings

and

the

savings

conditions

foreign

capita

income

is an

rate

on

is financed

gap

long

is

growth

initial

so that

function

population

The

limit

capital-

to save

requirements

[ 4 ] developed

exchange

so

marginal

the

the

capita

required

the per

aggregate

Cookson

debt

of

by

savings

generated.

capita

enough

which

the

foreign

for

long-run

high

income

investment

domestic

as per

of per

are

stock

propensity

time

capital.

the per

the

average

to project

and

marginal

through

rate

date

represented

of

of

foreign

termination

capita

growth

savings

filled

capital

A constant

of

a model

requirements to

the

increases.

a target

must

that

function

time

formulated

is related

such

increasing

[i0]

investment

ratio.

specified

and

Paauw

Model

a rate

domestic

target

from Exports

savings

growth

a model

of

growth will

rate.

to determine

trade are

deficits assumed

the and

exogeneous

12

d

increasing

sumed

at a constant

linked

_port-output

to the

level

of output

to grow

Debt

service

is dependent

on

repayment

period

trowed

to bridge

the

foreign

the

foreign

capital

capital

of

and

the

The

time

d debt

are

derived.

p to decrease

the

(i) the output

import held

and

growth

growth "close"

to the

on

than

the

export

date

exists.

than

the

debt

the

Even

date

rate,

growth

The

r_te

rate,

of

there

imports, for

some

the time

be higher

greater

than

interest

rate

than the

should

If the

growth

of

relations

at

rate.

then

effect

stock

exports_

level

of

growth

loan

economy's

should

rate

output

if the

gap.

conditions

least

interest

capital

the

zero

rate

the

export

and

of

(or at

growth

export

termination

rate

the

The

the

growth

rate); (2)

interest

paths

reach

export

on

at a

the

savings-investment

e suppressed. service

foreign

exchange

inflow

are

a constant

is specified

_te and

are:

by

Imports

Output

rate.

oductive

rate.

ratio.

natant

the

growth

are

be

rate

of

both

less

a finite

termination

interest

is greater

wil!

still

provided

the

interest

rate

Cookson

[173

applied

the

and

Cookson

be

a

is sufficiently

close.

Paauw capita

and

marginal

savings

model

the

Fei-Paauw debt

per service

13

model

to

data

including

the

target and

rates

3.5 percent

0.36_

the

projected

to

million

hand,

the

in 1965

fall

zero

six

rate

savings

rate

gaps

high On

indefinitely_

of

were

gap was

years,

increase

GNP

growth

savings

a fairly

plan

capita

exchange

gap

Bank

level

projection

the was

of

other $49 million

without

a

Economic

Model

Analysis Bank

Development

has

developed

Model

for

making

(MSM)

economists

at the

modifications

specified

6.1%

exchange

International

assumed

The

from

per

marginal

foreign

1975.

within

for

(or,

and

development

date.

World

conditions

the

capita

gap to

countries,

2.8 percent

rapidly

would

The the

Asian

Using

a per

1965

foreign

termination

of

and

to

and

The

of

savings

from

$118

Southeast

for population

GNP),

projected

3.

six

Philippines.

growth

aggregate of

on

Bank

that

gross

rate,

Department

Reconstruction

and

and

used

Standard

used

this

simple

in aggregate product

total

a Minimum

projections.

to project

domestic

related

Projections

for

country

if desired, of a country

and

gross

Country

model_

the

economic

terms. (GDP)

with

The grew

investment

model

at

a

to

the

14

change

in GDP

by

output

ratio_

and

by

external

the

the

a more

The

RMSM

culture

and

assumed

to added

taxes

are

rate.

has

gives

gap

to be

computed taxes

plus

revision

of

filled

the

at

at

was

Revised

gross it specified

done

to make

device.

industry,

sectoral The

sum

factor

a percentage

GDP

the

and

sectors:

rate.

GDP

as

exports,

basic

given

called

disaggregated

analytical

three

the

of the

cost. of

factor

value

agri-

added

is

sectoral

Indirect

GDP

prices

at

factor

equals

GDP

cost. at

prices.

Sectoral cients

are

sectoral the

plus

capital

trade

model_

and

Each

at

the

The

useful

others. grow

value

is

the

(RMSM),

imports,

savings

model

of

Model

a maximum

market

incremental

for

version

product,

Indirect

an

capital.

Standard

domestic

of

computed

A revised Minimum

use

related housing,

applied

fixed total

the

incremental to

sectoral

investment.

of

fixed

"exogenous to growth education

of

capital value

element

of

output,

for

other

added

7'he gross

investment

and

output

in

ratio to

fixed

the

of

the

sectors

which

instance,

forms

derive

investment

three

investment

coeffi-

is not

social

investment and

in

economic

15

infrastructure". is

related

GDP.

The

to the

Alternatively,

to both change

fixed

to

are

goods,

non-factor

for

price

indices

class

at current

class

gives

are

constant

on

deemed

simple

exports

rates

to national

are

expressed

and

then

"resource to be

gap"

filled

at

current

on

goods,

inter-

goods,

and

using

imports imports

level

by

of

in disaggrega-

may

be

equations

The

using

value

export imports

capital.

based relating

added,

exports

determined.

external

by

services

sectoral

is then

Import

This

of

import

prices.

the

excess

equals

stocks.

the

non-factor

prices

by

in

of

variables.

The

investment

obtain

total

aggregates,

aggregated.

is required

to

to

as proportional

categories.

a country.

in current

increment

estimated

or econometric

socioeconomic

the

are

projected for

the

consumer

The

and

investment

capital

other

applied

goods

are

growth

other

called

of

into

these

imports

suitable

and

of

prices.

prices

change

Imports

then

total

Exports

the

fuels,

each

and

gross

classified

food,

GDP

Total

plus

services째

elasticities

of

fixed

is postulated

GDP.

investment

Imports mediate

level

in stocks

increment

gross

tion

the

gross

figures

price over

indices exports,

This

gap

16

Using

national

income

consumption

and

savings

consumption

can

be projected

consumption

is computed

product

is GDP

income

is gross

trade.

Gross

factor

the

previous

of

plus

national

taxes.

gross

national

savings

gross

savings,

which

to gross

national

income.

savings

serves

exceeds

the potential

national

is estimated The

a constraint.

value

and

imports

of

by

terms

is added which

domestic

savings.

savings

savings from

plus

plus

to maximum

the

increment

gross

national

national

savings

potential

it is set other

of

is specified

If gross

savings,

national

gross

domestic

year's

Gross

from

is gross

Private

national

adjustment

income,

to Yield

rate.

Gross

adjusted

trade

total

Government

a growth

income.

product

marginal

potential

using

domestic

savings

income

calculated.

factor

is subtracted

national

be

identities,

a residual.

a terms gross

Potential be

as

national

to obtain

consumption

can

net

Similarly,

to GDP

net

plus

accounting

at

consumer

the

maximum

goods

is

increased.

Government with

respect

expenditures

to are

revenues GDP

at

are

current

projected

to

projected prices. grow

usingan

elasticity

Government

current

at a rate

equal

to the

17

growth of government

consumption

ra_e of the GDP price Exhibit

4.

adjusted

by the growth

deflator.

I presents

Narasimham-Sabater

the RMSM equations.

Model

The model

of Narasimham

and Sabater

of 33 behavioral

relationships

and fourteen

with 45 endogenous variables.

The variables

time, quantum Japan,

variables

index of world exports_

of copper

concentrates_

materials,

of imports_

consumer

durables.

relationships

identities,

and nine exogenous

exogenously

dollar export prices

[16] consists

specified

index of GNP of

of centrifugal

domestic

prices

and of exports,

sugar and

of imported

the period

raw

and imports of

The data used for estimating

covers

are:

1946 to 1969.

the

Projections

are made for 1975 and 1980.

4.1

Output

Output

is disaggre_ated

non-agricultural. capital

Determination

A_ricultural

stock in agriculture.

is a function

of capital

into agricultural output

and

is related to

Non-agricultural

output

stock in the non-agricultural

18

sector

and of the ratio ofnon-agricultural

agricultural

prices째

The mining

subsector

of the non-agriculture

treated.

The output

its capital stock

equipment

industrial

machinery)

manufacturing output

and manufacturing sector

of this subsector

(whose estimate

of durable

that are clearly

relative

gross fixed investment output.

determinant

to price

mined by disposable

consumption ciation,

and fuel.

The

Sectoral

by lagged value of

commodities.

sector, another

Investment

consumption

consumption

in

are considered

expenditure

is deter-

income and by its lagged value.

consumption

is related

income

to GNP.

(which is a regressor

expenditures)

taxes, corporate

from property

and

to GNP.

Private

Disposable

as

is the price ratio of agricul-

Private and government

Government

by

is one of the deter-

For the agricultural

tural to non-agricultural

separately.

identified

in agriculture.

is determined

of investment

stocks is related

is determined

and by the price in mining

of imports of raw material

sectoral

is separately

is based on the value

in mining and manufacturing

minants

to

plus private

is defined savings, transfer

for private

as GNP less depre-

and government payments

revenue

from the

19

government for

and

each

of

from

these

abroad.

adjustment

Depreciation

is related

and

payments

by

transfer GNP_

government

payments

from

corporate

Functional variables

to

total

from

the

revenue

abroad

saving

are

is

relationships are

capital

specified.

stock,

government

from

property

determined

a function

are

by

and

taxes explained

time

transfer trend,

and

of non-agricultural

income.

4.2

Exports

Exports products_

of

centrifugal

concentrates, explained of

and

by

coconut

and past

are

and

dollar

centrifugal

sugar

production take

into

export

level account

importer

of

logs

real

of

Japan

GNP

is and the and

by

current

its

lumber

that

is made

and

dollar Japan

are

or both. by

Exports

its

current

Centrifugal

sugar

production

production by

its

export is the

of copper

a determinant

copper

goods)

determined

lagged

fact

lumber,

domestic

Current

turn

(coconut

solely

levels.

price. in

of

factors,

determined

production

explained

and

exports

supply

are

groups

logs

other

or

products domestic

commodity sugar,

all

demand

exports its

five

of lagged

price.

To

principal

concentrates, of

exports

of

Z0

these also

two products. explained

exports

of

by

goods

assumed

to

of

export

of

increase

the

exogeneously

import

side,

specified.

related

to private

investment

(agriculture

previously,

raw

imports

quantum the

index

of

other

hand,

on

linearly

with

consumer

nondurables

in the

mining

second

determinant

import

price

and

is

time.

of

The

the price

of

of

imports

of

four

the from

function

balance abroad

of

subsector. materials goods

total

is

are

by

factor

and at

of

the

merchandise

determined

its

reserves

services

net

A

in mining

to reflect of

stated on

as a determinant

of payments, are

fixed

depend

international

commodities, Imports

while

As

imports

raw

is hypothesized

constraint.

to total

of

prices

a linear

fuel

imports

level

durables

expenditures,

manufacturing

to

are

non-agriculture).

current

the

of consumer

linked

and

and

relative

manufacturing.

are

material

output

payments

are

remaining

services,

consumption

goods

On

The

to the

Imports

investment

to be

concentrates

Imports

On

exchange

copper

price.

related

Exports

4.3

are

its are

worldexports. simply

Exports

foreign

assured imports.

income

cumulative

trade

21

deficits.

International

function

of

gross

4.4

The

price

rates

are

in

also

most

prices

change.

Each

endogenously

expressed price

explained

by

Price

changes

agricultural

in non-agricultural

change

in the

non-agriculture

changes

of

in the imported

4.5

set

the

5.5 percent. income

using

projected

pesos

in 1969

of

exports9

In addition

output,

the

is

price

affected and

by

by

the

price

Results

purposes, rate

sectoral

elasticities.

projected was

growth The

the

in agriculture

prices

s_ctor

by

products,

projection

target

a

annual

explained

changes

sector

agriculture

Projection

For

of

commodities.

growth

change

is

in the

to the

price

to be

determined.

in terms

change

output.

are

assumed

product.

are

are

sectoral

of which

are

Prices

equations

of

growth

domestic

Sectorai

Sectoral

reserves

the

Then model

to

decrease

to

56 million

for

Narasimham gross

growth the

and

domestic

rates

national

pesos

product

were

derived

accounts

relationships. substantially

Sabater

The from

in 1980.

using

were

savings 1,273

On

at

the

gap

million other

22

hand,

the

import

three

times,

The

two-gap

resemble

Cookson

model. as

be

The

increasing

the

country's

gap

features

of

and

(2)

of ,Japan, the

of

is

and

Fei-Paauw-

the

savings

gap

but

it reflects

imbalance.

Narasimham-Sabater

Model

Narasimham-Sabater (I)

the

will

projections.

disturbing,

the

the

copper

the

almost 1980.

Fei-Paauw-Cookson

mention:

and

in

Narasimham of

trade

on

pesos

of

the

perennial

lumber,

output

in

trade

imports;

million

elimination

as

special

to increase

projections

Comments

Two

and

3,712

the

abrupt

4.6

projected

projections

The

not

deserves

was

reaching

Sabater

fuel

gap

the

separate

dependency

treatment

of exports

concentrates principal

formulation

on

the

importer

of

of

of

logs

national these

two

commodities.

Fuel estimates

import of mining

itself

will

energy

crisis

even

more

factor imports possible

requirements

be

and

useful

the

will

affect

to relate

and

and

can

the

wages

general

of oil,

explicitly

to relate

output,

In view

price

be

projected output.

useful.

increasing

if fuel

of production

be

manufacturing

information and

can

how and

price

the

This

on in

of the it will

be

treated

as a

cost

fuel

prices. level

based

of

It may

to price

of

be

23

fuel,

or to

an

appropriately

import

ment

may

include the

weighted.

be

to

the

Asean.

price

and

the

specific

by

and

as

regressors

in the

be

treated

exogenous,

In the

case

may

the

to

be

of

largest

significantly

Philippines and

There

is even

coconut more

exogenous

because

the

market.

world

The

are

simplistic.

in

Thus,

the

5째

but

this

the

small

monetary

The

in

model

of

production

The policy

model

does

able The

setting

prices

Philippines

include

investment

not have

variables

Philippines

sugar.

import

not

and

assumed.

of

to verification.

the

does

may

been

the price

to assume share

not

of

is subject

used

prices

the

it has

may

be

Sabater

price

influence

Narasimham-Sabater component.

block.

world

and

of may

Export

though

justification of

exports

example,

the

Europe

averages

sugar,

to

countries

and

of

refine-

importers

these

even

fuel

one

as Narasimham

some

oil,

employment rather

weighted

exporter

have

of

equations.

influence

may

copra

for

of

in Western

in Philippine the

cost

of country

figures

export

sugar

the

dependency,

countries

share

commodities

as

export

income

their

With

number

some

National

be weighted

On

expand

U.So

index

do not

as in

wagefunctions

a financial appear

at

all

model.

The

UNCTAD UNCTAD

Model has

econometric

countries.

These

ments

on varying

based

models

are

models used

assumptions

for

to

some

estimate

regarding

47 developing capital the pace

requireof

world

24

growth

and

pattern

The

individual

the

volume

and

the

availability

model

formulation

UNCTAD

used

some

variables,

to

flows.

in

survey,

value

estimated

as

the

1955

For

to

1973

For

are

description.

estimated

the purpose

formulations

product

are

discussion.

is regressed

in agriculture

a linear

non-agriculture

lagged

by one-half total

from

reported and

to

relationships

for

in

Features

in the

cumulative

as

relationships.

chosen

have

of parameters.

36 equations

data

several

The logarithm

sector.

model

and

in data

similarities

Annual

three

is

domestic added

of

prieesp

each

Philippines,

has

the

one

the

as exogenous

Differences

significance

consists

whenever

Model

Gross

of

or

They

to differences

the model

only

5.I

due

model.

two

take

relationships.

structure

estimate

presented

total

financial

[20],

Its

presehted,

commodity

model

Tuong

were

this

trade,

statistical

Narasimham-Sabater

of

of world

are

and

identities.

and

all

30 stochastic

availability

by Ho Dac

models

of

20 to

development.

country

value

about

The

of world

of

and

sector

of

value

time.

is related

year.

Capital

investment

in

stock

fixed

the

non-agriculture

agricultural

function

against

added

Valued to

added

capital

is proxied

assets.

is

stock by

25

Private

consumption

basis as a function which

of:

is expressed

(I) a per capita

is dell.ned as GNP adjusted

tax revenues;

income

relative

(3) lagged per capita private consumption Investment product

adjusted

manufactured

goods,

Government

to tax revenues.

is determined

by gross domestic imports of

prices of agriculture

are disa_gregated

tobacco;

Since the Philippines

into four groups:

(2) raw materials

(SITC 3); and

fuel, the exports

and

products.

(I) food, beverage_ (5) fuel

related

and the relative

Exports of goods

export

consumption.

for terms of trade effect,

and non-agriculture

fuel);

(2) the ratio of

to non-a_riculture_

is simply linearly in fixed assets

income variable

for the terms of trade

and net of government in agriculture

on a per-capita

(4) manufactured

(excluding goods.

is not known to be an exporter

in this category

items with code SITC 3.

pertain

_ach export

to

of

other

commodity

group is expressed as a function of world demand for that commodity as well as the price of exports relative to

value index of world exports is estimated

is determined

exports of the commodity. Total value of as a function (rather than the total)

by its lagged value,

of exports of the commodities.

by world

Export

exports

and

of factor services

26

by a dummy variable.

Exports

of goods and factor

services are regressed

against

exports of goods,

of computing

it as the sum of exports ef goods and

exports of factor services. inconsistency

Food., beverage,

proportion

of total

depend

non-agriculture

index of spot prices to the GDP deflator. goods

imports.

spot price

the same four

tobacco is a

Imports of raw materials

value added arid the weighted

of raw materials

i_iported relative

Imports of fuel and of manufactured

are each regressed

weighted

of

amot:._the data.

are also di.saggregatedinto

groups.

on

This indicates problems

or non-comparability

Imports commodity

instead

again.st GDP and the ratio of the

to the GDP price d_._-_flator. Imports

of goods are estimate@, from the total o:f imports of the 4 commodity

groups.

in turn dependent

Imports of non-factor

and non-agricultural

goods

prices

deflators

sectors

imports,

sector

are determined

are dependent

on agricultural

and its own lagged price.

for the agricultural

are determined

and by its own lagged value.

agricultural

are

on imports of Eoods.

The implicit price

Agricultural

services

prices_

bythe Prices

endogenously.

price of export in the non-

on GDP and value of the price of imports,

The general price level in

27

turn

is a function

prices. index

The of

lagged by

price

spot

the

of

exports

prices

value.

The

the weighted

lagged

of

index

factor trade

residually

determined

5.2

UNCTAD

places

prices. rather

of

SITC

imports

spot

by

0 te

the weighted

97 and

is similarly

prices

o_

by

its

determined

imports

and

by

its

to

the

abroad, is related

Investment from

on

model

the

in inventories

national

the

UNCTAD

does

not

have

finding

]'he formulation

of

the

Investment for

goods_

agriculture causation

and

terms and

The

internal

investment

being

appropriate

of

function

effect_

imports

terms

of trade

The

of

exports because

is

as a function

more

to explain

a determinant

disaggregation

is not

trade

block.

deter_llinants of

is postulated of

identity.

a financial

investment

non-agriculture,

is for

imports

the

income

is

Model

on

adjusted

grouping

p_yment

a limitation

weak.

factured

gaps.

Comments

The

than

of

income

cumulative

GDP

of

non-agricultural

is determined

of expo_ts price

and

value째

Net

This

agricu!tUr_l

of

of manubetween

logical

imports_

rather

investment.

on

the

basis

Philippine

of

major

SITC

28

exports It

falling

is better

and

in

to

same

identify

hypothesize

of

the

group

the

are

modelled

country's

leading

demand/supply

rel_.,tionships

together. exports

for

each

one

them.

The

UNCTAD

measuring

world

respond

to

changing

only

6o

and

for

The

and

rate,

and wage of

price,

and

rate

by

long-.term

model

Philippine

structural

is appropriate

_od.el

eight'behavioral

five

exports,

wa_e

ASEAN

tern_ projections.

variables

considered

the

to intensify.

with

the

mode], cannot like

eleven, endogenous

exogenous

the

deal

to variables

mode], of Encarnacion, of

variables_

is

trade

Macroeconomic

consists

import

supply

to

macroeconomic

The

of

The

is expected

medium

identities_

exogenous

ness

and

Encarnacion

Bautista

three

that

designed

directly

trade째

interdependencies,

short

The

_nd

pa_terns

trade

it is not

changes

is linked

growth

inter-regional Since

model

to

be

and

variables_

export

ieEislation.

by

supply, price. monetary

In view

relative

five

definitions.

money

regulated

market

equations,

notational

are

Mariano

to

of

wa_e Money policy the

the world

small-

29

market,

the

price

Exports

are

largely

export

on

The general

in the

export

ievel_

capital

The

and

real

GNP,

stock

and

general

are

represented

are

shown

are

stock,

goods

price

circular

between

government

from

the

nodes.

abroad.

relationships capital

endogenous while

The are

consumption,

investment_

blocks

gross

consumption,

total

These

variables

by

services,

private

imports_

rectangular

the

empleyment,

IA. shows

level째

and

and

income

in Figure

by

GNP_

expenditures, factor

of

development.

capital

employment,

inside

causality

_nd

exogenous.

prices

markets,

of

net

diagram

among

export

considered

the

imports

consumption

stock

be

by

variable

investment,

_overnment

can

promotion

endogenous

price

domestic

imports influenced

commodities

policies

of

of

variables

the

exogenous

direction

indicated

and

by

sign

the

arrows.

Real determined basically output

output, by

or

capital

GNP and

at

constant

labor

supply-determined.

is dependent and

ments

adjustments

reflect

price

inDuts.

It

Indirectly

o11 money

on employment

prices,

supply,

level. made

Since by

is

is therefore

however_

real

through

its

money

supply

monetary

effects move-

authorities

to

3O

conditions

in the

surplus

deficits,

or

it may

be

implicit

said

in

The

on

general

money

but

and

output째

domestic

separately

do

influence

to

the

from the

other

postulated

Imports relative

export

earnings.

Since

are

solved

in

labor level.

terms

of

and

simultaneously variables.

in the

model

They

according

value

of

equipment

hypothesized

The

profit

motive

To

realize

profit_

as

is ever the

GNP,

of

the

price

exports

price

of

level_

affects

and the

import.

determinant and

real

genera.l 4omestic the

to

by

is undertaken

machinery

imports

the

Thus

capacity

a major

be

variables

price

employment,

endogenous

determined

to

Investment Thus

other

and

for

relationships.

are

imports

country's

the

output.

formulated

output,

can

an indirect_

demand

rate,

is

Real level

of real

wage

in turn

price

play

expresses

money

level

spending,

considerations

function

output,

of payments

deficit

determination

price

supply

general

the

balance

Fovernment

demand

em.ployment

as dependent

marYet,

and

that

role

The

credit

to support

investment are

largely

a determinant

present

price

is

of

in the

real real

output.

imported, of

investment_

investment goods

output.

decisions.

to be sold

must

!.......... ,'.. ..... i ":;.'-!_'?'":: "

'.................................. // X t% ............................................ : ....... r_ _ ib;xpor

' .......... !:

•

,,:_:_"'................... t ,,_ _.i<_,) : .f: ...."/""_/" '? _-_/

f .....

y._':: •"" " :+ I Wage k]R

_/ >"

" ;-:'_'_"::.tGN."

!

a t e/ /

/

I

'...........

_{

,,, ................................

¢

_., ie

;

...

_

"

._

IEmP]._Y meek.

,

,,.

:

./

4...*--_ L_U_u.rt';

...... _i ......._ £"................... "" 'k ! ! " _",.,

r_

/

/

,/

'/

,

t Expo_ts/ X /

_

/

c__...: a_

....;I

:_........]

_

,'

,< .

.... ,4 ._.upply

i_ ...... \. i ' '_

I

"X

_ ........... ;7............... __z--_-- (Import )7i ......" .,..... ".,.. \Price

I

"_ ......"" ............_'_:'"_,-e

t

]

/,

"

/

_'_--_/

!."'_C_..: !'..i:. :"..,.. • " I.ON " ' I4C..:'[::?.,• £NCAt{NA.C

{,;r __' • '": p ] ?__m[._ r..e::mi_.'. : ti0 n • .:.::_.,;_ :.; .......:.4_ __....... ;,..,.-....: .. r' ';. 1.';..,

........................................... .._

f

3 \

\

\ •

'

:.

\

_/"'

'_J ................

2 .... i.-.':-_ ,:._ :...eve : , ., #"

.....

+\ ,

_.

\ \

:i .

_....................... -_I /" ...... _.......--

_-' ..... ,'

,._I_,._.r[: , "

'"h,

,,,

,.,_,_.! ................. :.

"-..............

,:

_;NCARNAC i. ON M("'' " .... '-",'';"

+\ .......

"

..... t

iL,.C.(.)_m,_

__/ "?ie

+ 7u---------z'-_-r_ *--'_

_

._ %.--_ _'_ :.,, ..,: ..,,._-. :, _.. ,,. _...._ :.,-

\ Inve s tme n c

--, .,-

,, _":._ ; ,,. :,4"

......... _..... ' ":'.-'t_L ' _.,L_. c:. i_

"" " .

............................. 'L............

'-

'['aXRevc,tl, ue

32

stay

ahead

Thus

the

of

increase

price

function

as

level

and

explanatory

Capital past

in labor

stock

wa_e

costs rate

and

enter

etlher inputs. the

investment

variables.

is

the

cumulative

building

up

of

investments.

Figure receipts,

IB

private

expenditures, from

abroad

and

indirect

and

on

total are

taxes.

Private

income_

price

expenditures income value

that

identity

for of

based

on

imports.

and

preserves

model

net

parameters and

in

duration.

the

of

income

excess

inflow

of

were some

Net set

of

imported

indirect disposable

Government

item

prices

on

of

revenues.

national

that by

1950-1969, shorter

tax

a residual the

assures

rate.

of direct

duties

percentage

wa_e

income

in current

is a function

on

is

factor

comprised

GNP

current factor

equal

investment

foreign

functions,

data

the

over

capital.

using

of

to a

accounting

estimated

Most

tax

consumption

net

Customs

consumption level

and

Taxes,

a substantial

is matched

The

series

of

abroad

and

savings

are

by which

government

determined.

arebased

from

relationships

consumption,

taxes,

represent

the

consumption,

the value

goods

data

shows

annual time

parameter

33

estimates that the

are

conform time

made.

to ex-ante

paths

studied,

and The

of

observed

explanation

was

price foreign

mode], that

trade,

Figure model

and

The the

endogenous

explanatory

to

four

model,

were

o_

were

the

1970

between

predicted

predicted

values

difference

was

were

large,

an

Model

and

more

model

expanded than

consists

real

which

are

production,

direct

the

estimates

2 depicts

the

the

mode], was

expanded

level, and

accuracy

Projection

I0 exogenous The

the

variables

a comparison

of

where

macroeconomic

83 equations, variables.

from

signs

ÂŁorward.

Encarnaq.ion

The

gative

and

Using

of endogenous

Most

put

and have

zlternatives

predictive

values. close,

The

policy

assessed

reasonably

7.

various

predictions

was

significant,

expectations.

short-term

projections and

statistically

linked

monetary,

the

linkages

3 basic

aggre-

employment, submodels

and

for

fiscal

among

the

and the.

sectors.

besic

submodels.

linkages

variables

variables

o_

are of the

the

primarily basic

submodels.

of

80 endogenous

of

output,

to a total

one-way,

model

serving

with

Variables

as

3S

generated basic the

by

model

the

are

foreign

monetary

the

trade

via

specifically_

and

given

values

and

exogenous

value

mination current level

of

of money

the

national

reserves

reserve

real

basic

credits

real

the

wages

of

loans

not

income, The

the

commercial

and and

currency taxes

of dessi-

and

quarrying

_oney

supply

general

deDend

from

and

given

The

and

of the

price variables--

system, be

basic

the

deter-

on any

banking

the

level.

determined

monetary

ratio--can

is formu-

price

to banks,

other

affects

international

employment

model.

an

oil;

requirement.

does

is

exports

is

the

More

output

debt,

of

sub-model

of

submodel.

supply

government

the

production

determines

money

from

s tructur_l

variables

of

the

variables

of coconut

variable

supply

of

domestic

if GNP,

trade

exports

Bank

from

the

the

in mining

of

Central

values of

for

submodel,

reserves,

enter

to

price

supply

of manufactured

an explanatory

lagged

export

endogenous

concentrates.

the monetary

the

endogenous

foreign

wage

of copper

exogenous

mode],

in manufacturing

coconut_

as

the

variable

employment

lated

the

the

basic

are

money

do not

the price

explanatory

exports

the

and

and

submodel

determines

model

cated

exports

Although

of

indirectly

which

sector,

sector.

relationships

In

real

production

basic

submodels

inter-

determined model

are

36

known.

None

submodel the

of

the

endogenous

is a determinant

basic

model,

or

be

solved

trade

simultaneous the

monetary

will

recursive the

supply be

The

those

model

trade

of

results

the

7.1

The

This

model

initially

Bautista.

_ap째

The

it

Basic

output, basically

the

price

and

wage

the

employment

have

to

the

foreign

will

need

used

a

to

is conveniently

With

rate

these

and

that

assumptions,

can

are

to be not

found

assumed

be

solution

used

a

to solve

much

different

approach.

Model

developed

are

not

be

procedure

is very

equations

will

a certain

simultaneous

of

submodels.

Durposes_ at

does

medel,

turn

government

mstter.

submodel

government

computational

model.

from

no

basic

in

will' grow

the

equations

that

model

production

and

projection

money

there

complete

which

of

behavioral for

The

the

solution,

For that

the

and

the

sUbmodel

simu!taneously.

submode].,

solve

of

any

Consequently,

variables

similar by

employment_ the

the

Encarnacion, and

same,

variables

equation.

to

The

in

macroeconomic Mariano

price

except

for

a price/wage

behavioral

and

level combining ratio

equation

in for

37

imports

is removed.

is given, wage

postulating-that

and

general

dependence pressure while

the

serves

to pay

tax

retained.

Net

can

income are

set

equal,

price

equation

of

derived

meaning

to

living

the

increased remains

the

the

longer

gross

and say

same. are

also

a residual;

national

as a residual

Imports

The the

relationships

is no

money

level

indicates

if profits

a proportion

identity.

ctzst of

year's

consumption

is

re_.lects

higher

to profits)

the

product.

in the

exports

that

it

no

in current trade

gap

occur.

7.2

The

This

submodel

equations, five to

as

year.

the prior

income

for wages

the previ_u_;

!/ear__ wages

wages

factor

equation

by

of

investment

consumption

national prices

higher

government

is formulated Private

on

an

is determined

about

a proxy

The

and

level

brought

as

place_ wa_e

previous

dependence

before_

The

price

on wages

tendency year

on

the

(which

In its

two

exogenous

the

ratio,

Monetary

Submodel

consists

of

identities,

eight

variables.

The

submodel rediscount

are:

CB

loans

structural

endogenous

exogenous

government

rate,

seven

debt;

variables

variables reserve

to banks,

and

and

specific

requirement a variable

38

that

represents all factors,

affect the international are the currency the commercial of money,

banking

the money

the trade deficit, which

reserves.

in circulation_

and international money

except

system,

The endogenous

the available the monetary

supply, private

reserves.

to December

from October

domestic

for

figures from

of end-of-month

ve_r to September

The latter definition

the same one used link between

and the average

of

bank credits_

There are two variables

of the previous

current year.

reserves

baser the stock

supply - the average of end-of-month

January

variables

figures

of the

for money supply is

in the basic model and serves as the

the monetary

The January-December

s_bmodel

average

and the basic model.

does not give good L

statistical

results

the basic model.

in the equation

On the other hand_ this average is

found to be a statistically money

for price level in

in circulation

significant

and of private

determinant

of

time and savings

deposits. The monetary currency

in circulation.

a linear function system, government Money

base is the sum of bank reserves The monetary

and

base is given as

of CB loans to the commercial debt and international

banking.

reserves.

supply, using both of the definitions

a.bove_ is a

39

function ment

of the

ratio.

monetary

Currency

of money

supply.

loans

the.private

for

to

bank

loans

Demand

related, negatively

to

current

decline The

reserve

deposits,

the

tax

ratio

endogenous

basic

The 1970 leads

are and

captured model

can

are model

when

interest

as the

ratio

the

computed

the

currency in any

demand

to the

increases). reserves,

rate. of

positively

(due

wage

to

The

currency and

the

in

private

real

of

interest.

time

income

per The

after

deposits

all

have

ratio

itself

nor

other

relationships

been the

submodels.

estimates

found

to be

reasonably

lags

among

monetary

is more

wage

of

time

bank

hypothesized

separately_

than

included

in an annual

rate

for

interest_

Supply

function

The

on bank

and

other

submodel's

is

real

of money

and

functions

of

depends

and

be

Neither

deposits

rate

require-

a linear

specified.

a function

ratio

variables

determined.

the

sum

is considered

currency

in

the

is

to real

expected

defined

reserve

sector

negatively

ratio

to

are

the

requirement

circulation

capita,

to

credit

ratio,

the

supply

private

of bank

currency

time

and

in profits

supply

and

sector

be

and

in circulation

to the

GNP

base

model.

desirable.

of monetary accurate. vs.riables A quarterly

Variables However,

cannot

be

semi-annual

for

4O

The

7.3

The

Foreign

foreign

identities

and

equations

for

trade

i0

equations

goods,

and

abaca,

copper

and

products

and

sugar

Supply theorized

of

to be

capital

stock

data

on

capital

are

used.

bases

for

examined

stock

that

investment

rate, for in the

roughly it

mining

are

dessicated these

percent

on the by

the

of

export

total

the

over

decisions

basis

quarrying

with Since

surrogates

the years,

Since

of

the

determined

and

between

sum the

sector

and

investment

o9 profitabi].ity_

the

it

cap ]._al .+" is the

are

di.ffereuce that

function

stock, of

made

is

of production.

available_

concentrates and

for

a production

of surrogates.

is cenclu@ed

copper

_0-85

factors

is not

making

made

about

of

as

investments

is measured

prices

output

of

are

copra_

Together,

three

capital

commodities

oi]_

concentrates

labor

in search

decisions

wage

the

Takin_ _,note

accumulation

export

and

exports.

copper

and

materia].s_

plywood.

represent

supply

c_mmodities

coconut

lumber,

of merchandise

raw

seven

concentrates_

logs

paid

The

of

e_ three

-- seven

export

import

services.

consists

eauations

principal

for

coconut,

value

submodel

structural

seven

demand

..Trade Submodel

priceand

of past sum and

which

export

of past a time

wages

41

variable of

are

copper

trates

surrogate

concentrates.

and

the

same

to historical

determined

labor

the by

employment

and

the

on

the

of

domestic

output

are of

manufacturing.

Exports

to

price,

substitute_ Plywood plywood. variable sugar, for

the

ply-wood,

export

is

It is for

wages

statistically

aba{:a is related

in the

a_ricultural

coconut

is

coconut

coconut,

price

of

of

coconuts

and

of

as well

as

of

to the the

dependent that

exports of

Total

dessicated

by and

logs

and

is

wage

in

related

of their

output

of

relevant

output

of

on Philippine

were

is the sum

loRs.

expl_natory

quota

exports

price, rate

are

price

the_U.S,

exports

terms).

on domestic

only

sugar

coconut,

export

lumber

domestic solely

its real

export

the

to be

(in copra

determined coconuts,

as most

US market.

is hypothesized

the

and

found

sugar

inasmuch

of

of dessicated

copra

output

exports

export

concen-

supply.

dessicated

its price,

oil

their

supply

in manufacturing.

domestic

Coconut

to be

of dessicated

for

the

of copper

export

and

prices

supply

dependent

the

export

past

found

export

prices

a substitute

The

of

explain

exports

not

logic,

abaca

while

copra,

are

determinants

By

that

Past

employment

significant

sector

variables

of

destined the

exports

42

of

the

eight

principal

commodities

and

of non-principal

commodities.

Imports production price are

in the

level found

goods

and

significant

and

and

related

primarily

to

companies,

foreign

imports.

Imports

residually, priority

just

in the

period

of

the

may of

be

and

as consumption

of export

of

capital

characterized

services,

insurance

charges

on

the

amount

goods

are

derived

scarce

as

effect

also

of

imports

of

of and

the

are

of

given

paid total

low

:foreign exchange

by

coconut

local

oil.

foreign

import

mechanism

to question

subject and

are

variables

signs,

Imports

Imports

consumption

feature

influenced

copra

of

price

general

during

controls.

price-setting

is not

and

dependent

allocation

A major exogeneity

supplies.

freight

are

The

substitution

effect. of

by

domestic

of opposite

investment,

substitution

the

index.

price

foreign

to

consisting

the

some

determined

sector;

price

domestic

by price

are

import

reflecting

are

materials

manufacturing

the

to be

expected, between

of raw

prices.

for

It

supply.

verificati(m is

submodel

This

Philippine

export and

trade

_urther

is

assumes

export This

that

products

in

assumption

assumed

the

case

that

the

;

Philippine

does

not

have

any

influence

on

import

prices.

45

The

relative

above

smallness

assumptions

7.4

Production

are

agriculture,

In the wage

each

of

for value

case

are

stock

and

investment

seven

exogenous

model.

These

endogenous

forestry;

price

added_

mining

and

prices_

The

in the

variables exogenous

variables

and. quarrying;

and and

commerce three

determined

the

and

endogenous

employment

m_nufs_cturing

vg.riables

comprise

there. are

concentrates_

are

communi-

services.

remaining

copper

submedel--

stor_ge,

sectors,

transport

of

the

production

transport,

seven

is added.

variables

makes

large.

in the

commerce;

the

trade

Submodel

_nd

of mining,

variable

and

sectors

utilities;

For

by

construction_

and

variables

seven

fishing

manufacturing; cations

plausible,

The

There

o_ Philippine

the

levels.

sectors,

a

endogenous and

capital

sector. in the

The basic

fifteen

lagged

22 predetermined

variables.

In each demand

sector_

functions. rate

there

In the

sectors_

wage

sectoral

relationships.

are

mining_

determination

supply,

employment_

transport, is included

In manufacturing,

and

and

commerce

among capital

the stock

44

formation

is also

In lagged ment

agriculture,

value in

from

other

observed lands

on

the

The

The

general

other money

Mining

level

has

a supply

value

turn the

for mining째 increases

mining

prices.

at

sector The

capital

stock

sectoral The

in

the

the

explana-

agricultural

disposable

income

assumed

to that

to

proportionately

added_

wage

price

similar grow The

determine

price

of

copper

the

growth

rate,

is based

lagged

sectoral

on

is found

of

copper

secteral

Wage

in rate

wages

in

and

recursively.

of manufactured manufacturinE

of

concentrates

a specified

solution

Production.

of employment

in other

for

function

of mining

price

by

agricultural

function are

Employ-

w;_ge rate.

to

and

the

its

obtained

with

among

determinants

is

concentrates

sum

included

demand

Employment

growth

the

opportunities

agriculture. the

employment

from

is

on

index.

is consistent

laborers

in the

price

employment

employment

price

is dependent

residual

This

of

of

added

agricultural

sectors.

variables

output.

the

aggregate

in search

tory

value

is

migration

sectors.

and

and

agriculture

deducting in the

depicted.

_oods and

is dependent

the price

of

the

on goods.

45

Hmployment capital

linearly

stock

genera ! price goods. added

depends

on

output.

is a function

of

aggregate

level

price

Reduced and

form

va_ue

simultaneously

of

with

the

determine

the

are

jointly

The

employment

and

output

depends the

the

of manufactured

derived

for

value

level

level

and

the

Prices,

output_

the

output

demand

and

values.

The

wage

rate

lagged

wage

rate

and

its

on current

services in the

current and

disposable

and

by w_ges

and

price

wages

and

determined

of

supply

general

then

supply

the

level and

determined.

sector,

from

from

is determined

Wages

commerce

is determined

is

on

sector,

price

recursively

Employment

dependent

its

_rices.

solved

of

The

i

sector.

are

In

output.

are

in

investment_

level

in construction

Employment

product

employment

function

equations

added

functions.

output

the

increase

price.

The

price

and

The

supply

functi

from

the wag

current

price

is projected

output.

income,

leve

is formulated

services

lagged

price

sector Price

values and

of

level

base4 is

on ]

linearl

services

of value general

as

added

price

lev_

46

The

total

subtracted model.

from

The

taxes

and

of

all

GNP which

difference

net

7.5

Government

government and

two

variables

and

eleven

exogenous

variables

the

basic

The tax

business

also_-has rates are

for

based

Personal

on personal income

entrepreneurial Indirect projected

GNP

Direct

and

tax

endogenous

Five

of

the

determined

taxes_

receipts

income

the

compensation

of

property

directly

as on

gross

from

serving

equatinn in tax

from

persons

year. employees,

income

sales

six

change

receipts one

such

receipts

tax

l_gged

and

into

rate,

The

to reflect tax

tax

wage

in_ome_

income,

income,

to depend

thirteen

variables

annual

4

income

includes

business

indirect

structural

variables.

Direct

variable

in 1968.

eleven

It has

corporate

a dummy

basic

submodels.

categories.

as surrogate

has

disaggregates

on

the

abroad.

endogenous

monetary

is based

in

is

Submodel

exogenous

submodel

revenue

from

submodel

are

added

depreciation_

identities.

8nd

value

is determined

income

equations

in

sectora!

represents

factor

The

The

the

of persons.

taxes_ national

are product.

47

Import duties

are charged against

goods and services. account U.S.

An adjustment

indirect

and current

government

from all other national

government

development, service

and

development

based and

government.

_xpenditures

government. on

tax

money

National

Social

receipts

wages

to

defense

be

paid

to

expenditures

which

is

sourced

portion

of expenditures

total

development by

from

debt

outstanding are

employees. from

tax

receipts.

for national

the

on population

alloted

total

are dependent

of

borrowing_

the

defense A large

defense is for wages

of civil and army personnel.

defense expenditures

economic

expenditures

_overnment are

debt

for

receipts

in

economic

defense,

tax

change

augmented

budget,

and salaries

of .total the

govern--

general

and

residually.

classification national

a function

Receipts

disaggre_ates

development,

government

the

also

social

are

national

taxes are derived

functional

of

function of total tax

in the basic model.

submode],

by

by current exports

Total tax receipts

are a linear

receipts which are determined

expenditures

of excise taxes,

etc. are explained

GNP net of exports.

the national

The

to imports from the

taxes consisting

fees and penalties,

of

is made to take into

the tariff rateapplicable

Other

ment

the value of imported

Thus national

on total tax receipts

48

of the

national

Expenditures debt

government

for

outstanding

debt

general wages

and

tion

tend

that

the

7.6

are

particularly

exports later mining

and years_

aggregate

the

of

seemed

was output

not

1976,

and

projection

for

sal_ries

size

of

and

the

however

popula-

geods and

period.

generally

years some

of

became

the

results

that

abaca negative

employment

in

in the

high.

(1977-2001),

encouraging. capital

savings

to make

Specifically,

output

projection

and

used were

earlier

consumer

to be

was

results

improvement.

long-term

performance

The

were

and projected

sector

For

after

imports

for

model

in the

There

for

repay

serves.

1972-1976.

areas

to

Expenditures

the

Encarnacion

acceptable,

indicated

rate.

}_esults

from

period.

wage

incurred

pay

with

_overnment

projections

projection

to

to increase

expanded

are

government.

spent

Projection

The

on money

service

of the

services

and

rate

stock fell

Growth

the

rates

unexpectedly from

0.!1

to

for declined 0.04

over

49

7.7

Model,

Comments

expanded

real

price

level_

and

income, determined The

monetary

the

into

determined

by

the

for

demand

variables

the

income is

and

without

what

feeds

in current interest

back prices

rates

in

feature

is the

absence

of

demand

function.

reserves,

and

level,

and the

of

financial The

other

effect

financial

employment,

a role

and

further

supply

level

is

In effect,

real

sector

for

interest

In the

the

market

for

real

wage

rate_

money

the

money

supply. the

The

The

price

of prices. into

submedels

the

from

money

income.

income.

The

money

derived

economy,

Another

price

model.

and

real

determines

basic

money

of

real

are

and. import

government of

in ,the determination

sector_

brium

and

basically

real

of

investment

components

the

supply

composition

production

submodel

feeds

the

_ncarnacion

employment

the money

consumption,

trade_

disa_gregate

GNP

given

determine

foreign

is

Nod el

of the

functions

rates

Encarnacion

model

rate.

that

the

In the basic

completely wage

on

monetary

bank

loans

not

equili-

market.

expanded

variables of money variables supply

of

Encarnacion

model

in the

investment

supply,

required

is through output.

the

50

One

area

is a closer Since

the

linkage

forces

period,

financial for

lags

cannot

any

the

desirable

The

be

payments.

major

linkage

equations.

based sets

the

Villanueva

and of semestral

data,

leads

and

it will

be

(if available).

model model

the

International

on

data

monetary_ and

from

1967

of

sectors

credit

and

Exhibit

are

used

in Exhibit

the

are

interest

in

the

IIo

same

model It

income-

balance

II presents

applicable,

Fund

to 1975.

covering

credi_t and

real

Monetary

macroeconometric

of relationships

level

Whenever

Encarnacion

real

to a shorter

If the

semi-annual

variables.

the

over

on availability

semestral

financial

the

the

from

of

output_

with

sectors.

Model

five

The

pronounced

data

model

is response

accounts.

a 20-equation

expenditures_

financial

income

quarterly

_ncarnacion

rates

more

depend

Villanueva

of

and

in linking

captured

Philippines_

consisted

real

to be

will

Viilanueva

in the

interest

headway

to use

formulated

linked,

of

national

DoP.

of the

between

tend

sectors

data

8.

improvement

movements

economic time

for

of

closely rate

being

the model

symbols

specification

used of

in

51

8.1

The

The

real

Real

Sector

sector

relationships

that

supply

-- the

output

relationships.

_mports

investment

(3), {20).

loan

charged

rate

private goods with by

the

the

output

and

the

price

and

level.

specification

taxes

of

A

and

determined

by

as

and

_4))

and

eauilibrium and

demand

is made which

variable

consistent

consisting

of

exogenous income

in imports

to the and

relation

the

import of

of

to the

is included

a function

the

{19).

relative

of

for

is determined

is a function

shifts

the

imports)

aggregate

definition

liberalization

real

(2)_

level9

services_

imports

reflect

is

equations

determine

demand

imports

of

dummy

of

price-wage-employment

stock

real

consumption treated

together

and

output

set

price

relationships

price

to

restrictions Private

goods

capital

the

income,

A_gregate

of

for

and

consumption

investment,

function

Demand income

real

by

demand

income-expenditure

by banks

set

domestic

expenditure

private

the

services.

production _5),

(I),

The

supply

is described

income-expenditure

consumption, and

economy gross

income

and

condition

the

determine

The

c_c::_i3tsof

of

loan

general

in th_ resulting

from

policies.

disposable

model.

real

income,

Investment rate.

The

with

is

a_gregate

52

production and

function

capital

which

rate

which

the

employment

real

the

The

substitutes definition equilibrium determine rate,

demand

(6),

for

equation,

a function is

set

of money

the mechanism

equal

to

physical

is

for

the

by

the point

product

(i0),

the

supply

rsserve

money

(14),

condition

(12).

values

assets

rate

of

of

on

of labor

ofmonetary

equilibrium

in the

rate

of

on

interest

of money.

and

deposit

the

cash

(7),

deposit (13),

money

the

market

re!ationshiDs price

substitutes,

authorities money

for

the

relation-

with

identity

income,

deposit

the

of vault

demand

These

real

by

balances

holdings

money

of

the

described

reserve

banks'

currency

(II)_

the

supply

to employment

Sector

sector

with

an@

be

Financial

interest

foreign

as

level,

will

monetary

Bank

demand

level

the marginal

on banks'

Central

output

wage.

8.2

The

real

price-wage-employment

employment

between

the

ships

The

the price

and

equality and

stock.

depicts

wage

relates

market. substitutes

that The

level,

loan

and

net

are

consistent

equilibrium

eauates the

demand

53

The

portfolio

are

described

CB_

the

by

demand

loan. rate.

functions

the

for

de.mand for

vault

Demand

for

with. a decrease

discount

rate,

substitutes,

The

to positively

respond

and

the

domestic

CB

from

deposits

into

account

The

the

eo,uil.ibrium

is determine_

for

issues

of

interest

in the

of

an

9.nd

cost

is also

is

add

deposit

increase

deposit

rate

in

_h_

expected

substitutes

set

by

demand

supply

of

suS_stitutes_

_f deDo_iZ

interest

on

to

and, deposit

cash

sector

settin_

is exnected

rate_

Loan

with

function

balances

vault

quasi-banks

Balances

the

to depnsits rate째

rate

and

of _.eDosits

to private and

and

in loan

demand

discount

credit

cash,

inflows

banks

reserve

reserve

increase

an4,

for

for funds

takin_

substitutes.

deposit

substitutes

i_...verteddes.and for money

eeuation

(lz). The in the

portfo].io

demand

substitutes_ rate

of

currency price

real

and

currency_ the

interest

on

is expected

level.

function

for

of

income.

The the

of the the

deposit to

of

rate

of

for the

substitutes.

increase for

with

_eposit

interest on

m_blic

dema,n8

deter_aination

demand

rate

The

behavior

deposit

is described, deposit equilibrium Demand

income

and. the

substitutes

paid. on it, substitutes

for

is a

a,s well is

as

shown

54

as a function money

of real i_..come_reflect.in_ de_,_a.nd_ and

supply deflated The money

by tile _eneral price index.

supply

is defined

as equal to the money multiplier Reserve money equation

tb.e assets

and. liabilities

for balance

of payments

of the definition, of foreign assets (15) and the i_mport function an implicit

function

authorities,

C16) together

domestic

comprise credit

is determined

(i),

consist

of mo1_etary authorities Balance of payments

of net foreign

sheet

is

asse.ts of the monetary

constraint

the cre_..itsector of-the model.

authorities

on imports.

variables

of banks,

to ban_'s and non-banks_

requirements

The

to t.ileGovernm.ent by banks _nd non-banks

by policy-determined

and the monetary

of the banks and non-

with the defir_itions of its component

net foreign asset _osition Bank bonds

of monetary

real income and price icyel.

The balance

variables

sheet

equal.

The eauations

banks

It is shown

times the reserve money.

is determined, from the balance

setting

authorities

in (13).

such a,s the

is._ues of Central

credit given by CB

to banks_ .and ad-_ance deposit

55

The is

net

defined

as

authorities

demand,

residually

and

held

total

deposits,

lated

investment,

national

government-owned

is the

largest

The

demand

the

are

the

5 _ives

--

money

deposits

stock

The

equilibrium

and

components

of capitsl

stock

of

as cumu-

condition

in the

a schematic

commercial

is determined

public째

described

monetary

traditional

%etween

definition

and

for

deposits

the non-bank

income

Figure

on the

which

the

banks

influence

difference

by

of commercial

because

savings

as the

pos{tion

variable

Bank,

country.

time,

currency

exert

National

in the

asset

a policy

can

Philippine bank

foreign

for

remainin_

equations.

presentation

of the

model.

8.3

Comments

In the variables in the

are

real_

policy

expenditures,

It may the

_ross

the

Vilianueva

Villanueva

model,

determined

simultaneously

financial

It incorporates Fiscal

on

_nd

several variables

the

credit

monetary are

_odel

fir_anciel by

sectors policy

tRxes,

of

_overnment

credit

to the

be

observed

that

in the

is

determined

product

the

real

equilibrium

the

economy.

instruments.

and

domestic

and

consumption

government.

Villanueva primarily

model, by

,-56-

FJ.gUre::.3,

"TIIE VILLANUEVA MODEL

FLOW CHART OF THE MACRO MODEL OF THE PHILIPPINES'

/

=-

! G.oss,_OMr.,.; _,c..or_u(:Tl

l/I'-_ r---T-_----,_---_-?-i - ._;, t __t -__ -_1----,;

• Ill

TR,_D,T'ON_F_

I

L__N._J2N'2_N'_.A_N.."S'_--')_ " X_i;TI

1- II, _!°_'""_"''_], _..--__"_'_'---"1

I"_N_:_, _' -

_.

FOIt l, I(_]N I_[,.SEI_W_S

l) I:;C,OUN]

I_ArE

RE,SERVE R[OUIII[:M|'NI CII[I]IT

illdicille,

tha,_ (llll_l;tl(_

S

TO I_;_NKS

.........

CFH.DIT 1"0 G(IVEIINMFNr

.....

(7L_(.'; !'.

* Arrows

•

,_,: I_I_IIII

lll|hll_ll(:[!

57

domestic assets

factors.

money

of

the

enters

interest

on deposit

foreign model

aggregate

the

It appears

for

trade, an

attempt

impact

of

The

sheu!d

trade

is so

be made

exports_

foreign

indirectly,

the

loan

also

identity,

dependent to more

and

rate,

balance

determination that

imports,

the

subs titutes_

income

a country

affect

and,

demand.

national

that

the

exports

authorities

and

into

and

monetary

supply_

investment

Imports

on

directly

foreign

invest-

ment,

9.

The

Zialcita-Alfiler

This the

semestral

underlying is

(which

is proxied

implemente_

controlling

by

are

components

of

all

controlled

thmongh

Central

Bank

reverse

repurchase,

The

amount

of

of

assumed money

reserve

are

the

on

deposits) whose

exogeneous,

monetary

and.purchases

of money

savings

programmed

as

Monetary

cost

money

variable

operations_

money

the

reserve

to be

various

-- swap

rste

to serve

policy.

determining

amount

while

formuisted

monelary

"interest

reserve

Authority

is

for

by

the

components

Monetary

model

framework

policy

and

Model

The'fixed by

the

components

are

instruments

of

the

rediscounting,.repurchase_ and

determines

sales

of

securities.

the

level

of

58

domestic

credits

from

commercial

the

the

commercial

between

the

To_ether

affects

banking

monetary the

the the

the private

ban_in_

with

determine

to

total

deposits

and

deposit

prices.

Subsequently_ the

credits

lhe major

of the

domestic

of private liquidity

as

sectors

rate,

sectors

Domestic

serves

real

interest

level

government

system.

system and

an4

substitutes)

credits

_ross

It slaD

supFly_ which

domestic

link

economy.

investment.

(money

by

traditional

in turn

affects

product

is

determined.

9.1

The

Real

real

relationships government domestic

the

the

block

of

the

model

consumption_

expenditures,

imports,

consists

o_

investment_

prices

and

gross

product.

of

consumption of

sector

explainJ.ng

Private function

Sector

consumption,

disposable

in logarithmic

income

expenditures

government.

availability

_s

Private of credit

and. prices. dependent

on

investment from

the

form_

is a

Government tax

revenues

is determined

commercial

banking

by

59

system

and

the

cost

therefore

regressed

commercial

banking

savings_ of the

and

of

money.

against

own

government

is

investment

domestic

system,

its

Private

the

lagged

credits

rate

of

value,

assumed

to

of-the

interest

Public

be

is

on

investment

an exogenous

fiscal

variable.

Imports

are

broken

goods

and

imports

producer good

imports

price

ratio

.index), and import (in

(ratio

The

demand_

price

is exogenously

9.2

level

of

and

level

reserve

goods.

level

Producer

of

total

to

relative impoz_t price

seasonality consmner

in

Foods

consumption

and. _um_y

variable

(in

log

for

assumed! exogenous.

capital price

function

stoc_

level

a price

as

is Cobb-Douglas

factors

is a function expectation

of producof

aggregate

variable

(which

determined).

_%netay

The

imports by

of

investment_

price

production

and

imports

reflecting

are

_ggregste

general

total

rstio,

Exports

liquidity

consumer

variable

is determined

employment

of

_eneral

form)

The

into:

to

Similarly_

relative

tion.

of

a dummy

seasona!ity.

with

related

demand_

log

form),

are

down

_ of

Sector domestic

money.

credits Domestic

is credits

dependent fro_

on

the

commercial

6O

banks

and

the

Monetary

unclassified

assets

of net

domestic

foreign

assets

balance

of payments

lities

which

in the

monetary

system

system

prices_

by

semester. the

The

the

as

the

of

sheet

liabiequal

for

liquidity

liquidity

of reserve

constraint

total

of real

total

components

a

liquidity

a function

level

net by

to

total

level

The

total

again:3t demand

The

balance

the

constrained

terms

and

set

are increased

Thus_

in real

domestic

are

is set

net

system.

(deficit).

assets.

is expressed

aredefined

monetary

system

with

system

the

surplus

foreign

previous

monetary

of

of the

in the

income,

the

monetary

and

generated

of

assets

of the

domestic

Authoritytogether

of

money

the monetary

authority,

Exhibit appropriate_

III presents the

and Villanueva

same

Comments

This

model

model.

It lumps

substitutes,

symbols

models

9.3

and

variable.

Like

interest

variable

are

on

savings money

model

as

equations째

those

in the

Whenever

Encarnacion

used.

the

is more

the

the

Zia!cita-Alfiler

aggregative deposits_

supply

Villanueva

(MI)

than

the

Villanueva

time

deposi_s_

into

a total

model,

as a determinant

Model

in

it the

includes

deposit liquidity an

investment

61

demar:_ function, private by

._nother

investment

is the

tn'_: ..... _ com_.ercial

B._nk ope.r&tions

reserve

money째 the

loan

_ento

The

monetary

sector

through, the