Template-Type: ReDIF-Article 1.0 Author-Name: Juan Rufino M. Reyes Author-Workplace-Name: Bangko Sentral ng Pilipinas Title: Nowcasting domestic liquidity in the Philippines using machine learning algorithms Abstract: This study utilizes a number of algorithms used in machine learning to nowcast domestic liquidity growth in the Philippines. It employs regularization (i.e., Ridge Regression, Least Absolute Shrinkage and Selection Operator (LASSO), Elastic Net (ENET)) and tree-based (i.e., Random Forest, Gradient Boosted Trees) methods in order to support the BSP’s current suite of macroeconomic models used to forecast and analyze liquidity. Hence, this study evaluates the accuracy of time series models (e.g., Autoregressive, Dynamic Factor), regularization, and tree-based methods through an expanding window. The results indicate that Ridge Regression, LASSO, ENET, Random Forest, and Gradient Boosted Trees provide better estimates than the traditional time series models, with month-ahead nowcasts yielding lower Root Mean Square Error (RMSE) and Mean Absolute Error (MAE). Furthermore, regularization and tree-based methods facilitate the identification of macroeconomic indicators that are significant to specify parsimonious nowcasting models.  Classification-JEL: E40, E47, E50 Keywords: nowcasting, domestic liquidity, machine learning, ridge regression, LASSO, elastic net, random forest, gradient boosted trees Journal: Philippine Review of Economics Pages: 1-40 Volume: 59 Issue: 2 Year: 2022 Month: December File-URL: https://pre.econ.upd.edu.ph/index.php/pre/article/view/1027/952 File-Format: Application/pdf Handle: RePEc:phs:prejrn:v:59:y:2022:i:2:p:1-40 Template-Type: ReDIF-Article 1.0 Author-Name: Veronica B. Bayangos Author-Workplace-Name: Bangko Sentral ng Pilipinas Title: Does bank competition affect bank risk-taking differently? Abstract: This paper examines the presence of two competing views—“competition-fragility” and “competition-stability”—in analyzing the impact of competition on bank stability. The approach is to first construct measures of bank competition from a unique dataset of balance sheet and income statements for 542 banks operating in the Philippines from March 2010 to December 2020. The paper then estimates the impact of these competition measures on solvency risk or the risk of being unable to absorb losses with the available capital across universal/commercial banks (U/KBs), thrift banks (TBs) and rural/cooperative banks (R/CBs) industries. Using panel quantile regression, the results reveal that, at the industry level, bank competition reduces solvency risk and that it enhances bank stability. Looking at the risk distribution, the study shows the presence of the competition-fragility and competition-stability hypotheses holding simultaneously for U/KBs suggesting that the effect of competition depends crucially on the underlying individual bank risk. Importantly, the results highlight that the relationship between competition and bank risk is sensitive to other bank-specific characteristics and macro-financial factors related to extent of diversification strategy, cost-to-income ratio, deposit growth, capitalization, changes in the physical banking networks, and growth of real Gross Domestic Product. Classification-JEL: D4, G21, L1 Keywords: Bank competition, cost efficiency, bank solvency risk, COVID-19 pandemic Journal: Philippine Review of Economics Pages: 41-80 Volume: 59 Issue: 2 Year: 2022 Month: December File-URL: https://pre.econ.upd.edu.ph/index.php/pre/article/view/1028/953 File-Format: Application/pdf Handle: RePEc:phs:prejrn:v:59:y:2022:i:2:p:41-80 Template-Type: ReDIF-Article 1.0 Author-Name: Faith Christian Q. Cacnio Author-Workplace-Name: Bangko Sentral ng Pilipinas Author-Name: Joselito R. Basilio Author-Workplace-Name: Bangko Sentral ng Pilipinas Title: Insights on inflation expectations in the Philippines from a household survey Abstract: The study contributes to the literature on expectations by providing insights on household expectations from an emerging market and inflation targeting country like the Philippines. Using the results of the Consumer Expectations Survey (CES), a quarterly household survey conducted by the Bangko Sentral ng Pilipinas (BSP), the study is the first to look at the characteristics and determinants of household inflation expectations in the Philippines at a granular level. Results show that survey-based household expectations in the country are not rational. Filipino households exhibit an upward bias in their forecast of future inflation and they tend to rely more on information about past inflation to form their expectations. Nonetheless, in recent years, households have started to incorporate information about future outcomes in their inflation expectations process. To determine the factors that drive household expectations in the Philippines, aggregated (i.e., time series) and disaggregated (i.e., pooled data) data from CES quarterly survey rounds between 2010 and 2020 are used on a standard inflation expectations model. Empirical results point to a significant effect of income conditions, perceptions on economic and financial conditions, the inflation target, and demographic factors (e.g., educational attainment, marital status) on the formation of household expectations in the Philippines. Based on the findings and observations, the study draws insights for central bank communication strategy, particularly in influencing household expectations. Classification-JEL: D10, D84, E31, E58 Keywords: central banks, expectations, households, household survey, inflation expectations, inflation dynamics Journal: Philippine Review of Economics Pages: 81-110 Volume: 59 Issue: 2 Year: 2022 Month: December File-URL: https://pre.econ.upd.edu.ph/index.php/pre/article/view/1029/954 File-Format: Application/pdf Handle: RePEc:phs:prejrn:v:59:y:2022:i:2:p:81-110 Template-Type: ReDIF-Article 1.0 Author-Name: Eloisa T. Glindro Author-Workplace-Name: Bangko Sentral ng Pilipinas Author-Name: Jean Christine A. Armas Author-Workplace-Name: Bangko Sentral ng Pilipinas Author-Name: V. Bruce J. Tolentino Author-Workplace-Name: Bangko Sentral ng Pilipinas Author-Name: Lorna Dela Cruz-Sombe Author-Workplace-Name: Bangko Sentral ng Pilipinas Title: Heterogenous impact of monetary policy on the Philippine rural banking system Abstract: This paper shows the differential impact of monetary policy on the lending behavior of rural banks, with the bank lending channel being operational in small rural banks. While big rural banks are able to protect their lending portfolio from contractionary monetary policy by the size of their balance sheet, small rural banks with less diversified funding portfolio cannot. Moreover, highly capitalized rural banks are more inclined to protect their capital than expand their lending portfolio, following monetary tightening and higher capital requirement. The insignificance of gross domestic product (GDP) growth may reflect weakness in effective loan demand and lack of diversification that could have also impinged on the earning capacity of rural banks, as supported by initial estimates on the drivers of rural bank profitability. The finding on heterogeneous effects of monetary policy on rural banks has a secondary implication of lending credence to the principle of proportionality embodied in the BSP’s bank regulatory framework.  Classification-JEL: B23, C55, E52, E58 Keywords: rural bank, bank lending channel, monetary policy Journal: Philippine Review of Economics Pages: 111-134 Volume: 59 Issue: 2 Year: 2022 Month: December File-URL: https://pre.econ.upd.edu.ph/index.php/pre/article/view/1030/955 File-Format: Application/pdf Handle: RePEc:phs:prejrn:v:59:y:2022:i:2:p:111-134 Template-Type: ReDIF-Article 1.0 Author-Name: Jose Adlai M. Tancangco Author-Workplace-Name: Ateneo de Manila University Author-Workplace-Name: Bangko Sentral ng Pilipinas Title: How do exchange rates affect the Big One? An empirical analysis of the effect of exchange rates on RCEP exports using the gravity model Abstract: The often disparate and conflicting effects of exchange rate on bilateral exports reported by previous literature necessitate a further study of the relationship between monetary and trade variables. This study contributes to the stream of literature by analyzing monetary variables such as exchange rate volatility, exchange rate misalignment, exchange rate regimes, and real effective exchange rates with bilateral aggregate exports through a sample of 15 nations comprising the Regional Comprehensive Economic Partnership (RCEP) region for the years 1996 to 2017 using Ordinary Least Squares and Poisson Pseudo-Maximum Likelihood panel fixed effects regression. Results indicate that a country’s real effective exchange rate ratio and the exchange rate volatility for countries under a floating exchange rate regime reduce aggregate exports.  Classification-JEL: E52, F31, F15 Keywords: exchange rates, volatility, gravity model Journal: Philippine Review of Economics Pages: 135-165 Volume: 59 Issue: 2 Year: 2022 Month: December File-URL: https://pre.econ.upd.edu.ph/index.php/pre/article/view/1031/956 File-Format: Application/pdf Handle: RePEc:phs:prejrn:v:59:y:2022:i:2:p:135-165 Template-Type: ReDIF-Article 1.0 Author-Name: Cherry Wyle G. Layaoen Author-Workplace-Name: Bangko Sentral ng Pilipinas Author-Name: Kazushi Takahashi Author-Workplace-Name: National Graduate Institute for Policy Studies Title: The long and the short of it: revisiting the effects of microfinance-oriented banks on household welfare in the Philippines Abstract: Although evidence on the impact of microfinance is continuously accumulating, little is known about how long-term presence of microfinance institutions affects household welfare. This study addresses the issue by evaluating a household-level panel data and a unique event in the Philippines when the microfinance industry was mainstreamed and commercialized in the banking sector with microfinance-oriented banks (MOBs), which began to open in 2004. We find that the positive effects of longer MOB presence on entrepreneurial income and activities diminish or even regress over time. Moreover, no significant impacts are noted on real expenditures. Heterogeneity analysis further reveals that no immediate or incremental effects were observed on real expenditures of poor families and the immediate positive effect on entrepreneurial income and activities did not accrue in the long run. Lastly, no significant long-term impacts are noted on real expenditures as well as likelihood of and income from entrepreneurial and wage and salary activities of non-poor families from MOB presence. We, however, argue that MOB presence may reduce vulnerability as it affords households to be entrepreneurs.  Classification-JEL: G21, G23, G28 Keywords: microfinance, sample selection bias, household welfare, difference-in-differences, inverse probability weighting, Philippines Journal: Philippine Review of Economics Pages: 166-199 Volume: 59 Issue: 2 Year: 2022 Month: December File-URL: https://pre.econ.upd.edu.ph/index.php/pre/article/view/1029/954 File-Format: Application/pdf Handle: RePEc:phs:prejrn:v:59:y:2022:i:2:p:166-199