The Dynamics of Income, Money Supply and Inflation Rate: The Case of The Philippines and China

Abstract

The primary objective of government intervention in the market through monetary and fiscal policy of the central bank any state, like Philippines and China, is to promote stable rate of prices that will result in balanced and sustainable economic growth and economic activities of both consumers and producers. However, even though these policies were made focusing on price stability, high levels of inflation rate persist in the Philippines. For the year 2023, countries in Southeast Asia recorded an alarming inflation figures and rapidly depreciating currency due to economic recession brought by the Covid-19 pandemic as well as the conflict between Russia and Ukraine which resulted in a volatile global fuel market and food shortages. Compared to other ASEAN countries such as Philippines, China still manage to lower its inflation rate despite of the pandemic situation. In the model 1, the statistical result revealed that gross domestic product significantly affect the inflation rate. Simultaneously, the lagged of GDP and interest rate affects the gross domestic product while money supply affects the interest rates. In model 2, the results of the analysis revealed that Percentage Change in Money Supply and Gross Domestic Product has significant relationship with inflation rate. Simultaneously, the lagged of GDP and interest rate affects the gross domestic product while money supply affects the interest rates. Between the two models, the Model 2 is more feasible model to be used since the R2 is higher compared to Model 1 which means that collectively the fiscal and monetary policy affects the inflation rate of the Philippines.