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Polytechnic University of the Philippines

Sta. Mesa, Manila

THE EFFECT OF INFLATION ON THE ECONOMIC GROWTH OF THE PHILIPPINES FOR YEAR 1984
UP TO 2013

A Research Paper Presented to


Professor Maniego, Norie L.

In Partial Fulfillment
of the Requirements for the Course
ECON 3043-Economics of Money and Banking
1st Semester SY. 2014-2015

By
GROUP 1
Ahorro, Alyssa Dale
Consuelo, Claudine
Gonzales, Divina
Marpa, Mario
Picardal, Eloise Grace
Villarante, Mary Jhoy
September 2014
Abstract
General prices of commodities in the Philippines continued to rise more rapidly in the
past years. It is therefore important to know whether inflation rate has an effect on country’s
GDP growth rate. This study aimed to find out the significant relationship of inflation rate and
GDP growth rate in the country from 1984 to 2013. Descriptive research method was used in
analyzing the data obtained. The researches gathered relevant and reliable data from National
Statistics Commission Board Office and the Bangko Sentral ng Pilipinas and even the non-
government organizations like Trade Economics.Com and Worldbank.org. These data are then
processed and evaluated through the use of efficient software called Econometric Views
(EViews). It provided the researchers the precise results needed to validate their hypotheses.
From the results generated, as can be observed, if the inflation reached 3.1, GDP growth rate is
9.97 on the 1st quarter of 2012 and 8.67 on the growth rate if the inflation is 2.43 on the 3 rd
quarter of 2013. Moreover, as of the Philippines in the year 1984, when inflation rate soared
53%, the GDP growth rate was -19.20% and when inflation rate was 1.9% in 2012, GDP growth
rate turned 5.4%. This entails that an increase in the inflation rate have a spontaneous effect on
the Gross Domestic Product growth rate in the long run. It turned out that inflation rate slightly
affects the GDP growth rate positively in the short run but its effect is more visible in the long-
run as inflation rate gives a negative effect on the growth rate.
CHAPTER 1

THE PROBLEM AND ITS BACKGROUD

This chapter presents the Introduction, Background of the Study, Theoretical


Framework, Conceptual Framework, Statement of the Problem, Hypotheses, Scope and
Limitation, Significance of the study and the Definition of Terms.

Introduction

The Philippines, once belonged to the poorest countries in Asia, has been making
headway these years. It has been remarked as one of the fastest growing economy in its region,
with the purpose of attaining high and sustained growth.

Asian Development Bank has cited that private consumption and investment drove
economic growth higher in 2013. It is expected to continue in the forecast period, though
moderating from last year.

However, economic growths do not ensure a stable inflation rate. It was reported by
the National Statistics Office that despite the devastation brought by natural disasters and
higher electricity prices, the country’s inflation rate in 2013 was the lowest in six years.
Notwithstanding with the latter scenario, today’s increase in the general price level of goods
and services tend to pick up briskly:

May’s headline inflation registered at 4.1 percent from 3.9 percent in March 2014
and 2.6 percent in the same period a year ago. Inflation in the first four months of 2014 also
stood at 4.1 percent, according to the Philippine Statistics Authority (PSA).

Today’s condition, whereas the buoyancy of the price of commodities is likely to


remain the status quo, it is engrossing to know the relationship between economic growth
and inflation in the country.
This paper is organized to provide a rational explanation regarding the effect of
inflation in economic growth.

Background of the Study

The Philippines is a newly industrialized nation located in the South East Asia. The
country experienced low economic development earning it the title “the sick man of Asia” due
to its failure to attain the same level of development as what its neighbors has achieved.

However, in contrast to the fate of most of its neighbors, the Philippines registered an
average of 4.9 percent on its Real GDP growth rate on the year 2008 and 0.9 percent in 2009, a
very upsetting situation due to some Asian countries such as India recording an 8 percent
growth on 2008 and 6.5 percent on 2009, and Vietnam with 6.5 percent on 2008 and 4.4
percent on 2009 respectively.

In some instances the efforts of the people and the administration has evaded vanity;
the country did achieve a success from which the economic growth of the Philippines averaged
4.8 % in 2000-2012, grew by 7.8 % in the first quarter of 2013, faster than some countries. The
quarterly growth rate was the highest since President Benigno Aquino III took office in 2010.
Also, it ranked 16th out of 42 countries in the Asia-pacific region in the 2014 Index of Economic
Freedom, reflecting notable improvements in investment freedom, business freedom,
monetary freedom, and the control of government spending.. The country has also ascended 5
notches to 38th out of 60 countries worldwide on back of strong macroeconomic fundamentals
and upbeat investor confidence.

In the face of impressive growth figures, the Philippines is dealing with many challenges.
Among these is the tangible rapid change of the price level of goods and services. Thus, the
government introduced policies to help mitigate inflation rate.

The BSP’s approach to Monetary Policy has been introduced. The policy’s objective is to
promote price stability, which is genuinely conducive in accomplishing balanced and
sustainable growth of the economy. It is mainly focused to achieving a low and stable inflation,
supportive of the economy’s development objective. The Philippine Development Plan 2011-
2016 was also introduce to set an ambitious goal of stable economic growth in the country in
six years.

The condition of the progress of both the economic performance and inflation is too
compelling for the researchers to resist evaluating. They want to know the effect of having an
escalated economy to the cost of commodities, in which the citizens are directly affected as
consumers.

Theoretical Framework

The study regarding the effect of inflation to the economic growth of the Philippines
from the year 1983 up to year 2013 is anchored to Endogenous Economic theory on Keynesian
Mode discussing the relationship of inflation rate and economic growth specifically the
Keynesian AD-AS Model.

Keynesian model framework comprising of Aggregate Demand (AD) and Aggregate


Supply (AS) curves, the AS curve is upward-sloping rather than vertical in the short-run; the
implication is that changes in the demand side of the economy resulting from expectations ,
labor force and policy actions such as discretionary monetary or fiscal policies, affect both
prices and output in the short run as predicted by the Phillips Curve (Blanchard and Kitoyaki,
1987 ; Dornbusch et al.,1996 ; Romer ,2001); therefore the Keynesian model advocates that
there exists a positive relationship between inflation and output. However, in this Keynesian
framework, it is not the case that inflation is itself a growth-enhancing force ; the point is
rather that if rising aggregate demand is leading to increased growth , then some inflation
pressures are likely to emerge as relatively benign byproduct. The positive relationship
between inflation and growth exhibited in the short-run dynamics is unsustainable in longer
term and turns negative with higher inflation rate.

Moreover, inflation causes real appreciation of the domestic currency and reduces
international competitiveness by making exports more expensive; in a country with fixed
exchange rate, inflation would lead to the deterioration of the trade balance and capital
outflows and impact negatively on the long-term economic growth (Dollar, 1992; Easterly,
1999).
Concepts and principles of this model will lead the researcher to a deeper analysis of the
study. This entail that inflation has a weak correlation to different variables that can affect the
economic growth of a country and every institution involved plays a vital role to the economic
sustainability of a nation.

Conceptual Framework

The flow of the study is discussed through conceptual framework. The study used the
system approach. The system of three frames is composed of input which went through the
process or operations and emerged as the output.

INPUT PROCESS OUTPUT

* Philippine Economic *Analysis of Data * Economic Growth


Indicators
*Statistical Analysis
 Gross Domestic
 Econometric Views
Product growth
(EViews)
rate 2004-2013

 Gross Domestic
Product growth
ratd 1984-2013

 Inflation Rate

FIGURE 1: CONCEPTUAL FRAMEWORK


Statement of the Problem

This research paper titled The Effect of Inflation on The Economic Growth of The
Philippines for the year 1983 up to 2013 aimed to answer the following question: What is the
effect of inflation on the economic growth of the Philippines from the year 1983 up to 2013?

Specifically the study endeavored to answer the following:

1. What is the economic growth and inflation trend of the Philippines for the year 1984-
2013?
2. Does inflation rate affect economic growth of the Philippines for the year 1984-2013?
a. Does inflation rate affect the economic growth on short run basis?
b. Does inflation rate affect the economic growth on long run basis?

Statement of the Hypotheses

The null hypotheses tested are:

1. Inflation has no significant effect on the economic growth of the Philippines on the
1st quarter of 2012 up to 4th quarter of 2013.

2. Inflation has no significant effect on the economic growth of the Philippines on the
year 1984 up to 2013.

Scope and Limitations of the Study

This study was conducted to determine how inflation affects economic growth. Since
inflation is a condition, when cost of services coupled with goods rise and the entire economy
seems to go out of control. Whenever there is expected inflation, governments take
appropriate steps to minimize the ill effects of inflation to a certain extent. Inflation often
increases when economies experience booms in the economy.

The study involved only the year 1984 up to year 2013 here in the Philippines. This given
period provides an excellent backdrop given the presence of fluctuations in the trends of the
inflation rate and economic growth for 30 years. For the short run basis, data from 2004 up to
2013 was collected. Data are gathered within this time frame which is subjected to specific
process to yield pertinent results. The Real Gross Domestic Product growth rate is used by the
researchers because among the indicators, this measures the growth of an economy either per
quarter or annually. Also, inflation rate as measured by GDP deflator is used to show the
fluctuations happening to inflation rate for the past 30 years.

To make this possible, the study was anchored on the official government data released
by the government agencies other independent organizations which are significant to the
subject of this study.

Significance of the Study

This study will be beneficial and effective especially to the following people:

 To the society: As price takers, sellers, and consumers, they will really be the ones who
are affected when inflation occurs. This study will help them know the changes in prices
especially of prime commodities and so that they will be well equipped in case of spikes
in inflation.
 To the Philippine Government: Government agencies especially the executive body is
tasked in crafting economic policies to rein in inflation and encourage economic growth
to lead the country to progress. This research paper shall help them make decisions
that will prevent or the minimize effect of inflation on the economy and formulate
effective solutions to the problem.
 To the students (especially Economics students): This study will help them understand
the important issues and its implication to the economy. Through their awareness with
the inflation’s effect to the economic growth, they will be able to make educated
consumption decision to somehow lessen its impact to their personal budget and
eventually contribute to small yet gradual improvement to our economy. This will also
ensure that they are equipped with the right knowledge that they can use for the
future.
 To the researchers: This study served in great part for the completion of the
researcher’s course requirement. And also led them to discover new knowledge and
widen their understanding on the relevant economic issues.
 To other researchers: This paper shall be effective and helpful reference for the
researchers who would intend to make any further relevant study about the effect of
inflation on the economic growth.

DEFINITION OF TERMS

Commodity is a marketable item produced to satisfy wants or needs. Economic commodities


comprise goods and services.

Demand is a buyer's willingness and ability to pay a price for a specific quantity of a good or
service. Demand refers to how much (quantity) of a product or service is desired by buyers at
various prices.

Economic growth is the increase in the market value of the goods and services produced by
an economy over time. It is conventionally measured as the percent rate of increase in real
gross or real GDP.

Economy or economic system consists of the production, distribution or trade,


and consumption of limited goods and services by different agents in a given geographical
location.

Government is a group of people that has the power to rule in a territory, according to the law.
This territory may be country, a state or province within a country, or a region.

Gross domestic product (GDP) is the market value of all officially recognized final goods and
services produced within a country in a year, or over a given period of time.

Inflation is a sustained increase in the general price level of goods and services in
an economy over a period of time.
Market is one of the many varieties of systems, institutions, procedures,
social and infrastructures whereby parties engage in exchange.

Price taker is a person or company that has no control to dictate prices for a good or service. In
the trading world, a price taker is a trader who does not affect the price of the stock if he or she
buys or sells shares.

Price is the quantity of payment or compensation given by one party to another in return
for goods or services. In modern economies, prices are generally expressed in units of some
form of currency. (For commodities, they are expressed as currency per unit weight of the
commodity, e.g. euros per kilogram.)

Society is a group of people involved in persistent interpersonal relationships, or a large social


grouping sharing the same geographical or social territory, typically subject to the same political
authority and dominant cultural expectations.

Supply is the amount of a product that producers and firms are willing to sell at a given price all
other factors being held constant.
CHAPTER 2
REVIEW OF RELATED LITERATURE AND STUDIES

This chapter presents the significant areas of the major components of the study. Each
section is organized under related literature, foreign and local and related studies. Insistent to
identify the effect of inflation on the economic growth, there is seemed a need to conduct a
research on the subject for a wider view of some relevant circumstances. In view of above
considerations, studies are presented as they lead justification to the study.

REVIEW OF THE RELATED LITERATURE


This portion presents a review of several literatures that would be beneficial to the study
summarized from previous writings, showing detailed facts asserted by few people on the
effect of inflation in economic growth. On this element of study some reviews of the
proponents and author’s passage in order to help the proponents to find ways in contact with
the problem that have been encountered.

LOCAL LITERATURE
Josef T. Yap has cited the stand of economic growth of the Philippines at various inflation
rate, at different periods of times on his discussion paper, “Inflation and Economic Growth in
the Philippines” (September 1996).

At the macroeconomic level, studies have been more quantitative in nature. There has
been recent cross-country evidence supporting the view that long-run growth is adversely
affected by inflation. An oft-cited reference is that of Fischer (1993). The framework that is
used is derived from endogenous growth theory which tries to determine the causes of
difference in growth rates in different countries. The negative effect of inflation on output
stems from the resulting macroeconomic instability which makes it more difficult for economic
agents to plan efficiently thus reducing investment.
In the Philippine the direct costs of inflation have been measured by estimating its impact
on output and its components. The welfare costs and distributional effects of the inflation tax
have been largely ignored. In the PIDS Annual Macroeconometric Model (Reyes and Yap,
1993a), for example, a rise in sectoral prices and the general price level results in a decline in
demand for the relevant sectoral output. This explains why the impact of a peso depreciation
on total output is contractionary, particularly in the industry and service sectors.

Inflation as a proxy for macroeconomic stability also has a negative impact on real fixed
investment in the PIDS model. Thus, controlling inflation will result in higher capital formation
and expand the future productive capacity of the economy.

FOREIGN LITERATURE

REVIEW OF RELATED STUDIES


This portion presents a review of few studies that would be beneficial to the study, showing thesis
abstracts asserted by few people on the effect of inflation in economic growth.

LOCAL STUDIES

Cesar B. Quicoy, Amelia M. L. Bello and Tirso B. Paris, Jr. on their paper, “Price Stabilization
Measures and its effects on the Philippine Export Sector” (1999), have supposed the result of
inflation to growth:

Using a general equilibrium model, it is showed that there was a structural relationship between
inflation and growth –- higher inflation reduced growth. They suggested, however, that future empirical
studies should take more care to control for the factors that influence both inflation and growth since
these are jointly affected by a number of other factors. The short-run relationship runs from output to
inflation, with higher levels of economic activity tending to push inflation up when aggregate spending
in the economy runs ahead of the level of output that the economy can supply on a sustainable basis.
FOREIGN STUDIES

Min Li of the University of Alberta, Canada, has proven that there’s a negative relationship
between inflation and economic growth in the long-run in his paper, Inflation and Economic
Growth: Threshold Effects and Transmission Mechanism.

Findings provide some strong policy implications. For developing counties, first, the
marginal negative effect of moderate inflation in the range of 14 to 38 percent is pronounced.
An increase in inflation by 10 percentage points per year will reduce economic growth by about
0.2-0.4 percentage points. This adverse influence of moderate inflation on growth will lead to a
substantial negative effect on economies in the long term. Second, policymakers should not
exert efforts to keep the inflation rate at zero percent since single-digit inflation (below the first
threshold of 14%) does not impede and can even stimulate economic performance. Third,
hyperinflation does not have hyper-negative effects on economic growth because the marginal
impact of hyperinflation is much lower than that of moderate inflation. Empirically, we can
observe that reductions in the hyperinflation rate have never had significant effects on
economic growth. Therefore, controlling moderate inflation should be the main goal for
policymakers in developing countries.

Robert J. Barro on his paper, Inflation and Economic Growth (2013) that was supported by the
National Science Foundation, England assessed the effects of inflation on economic
performance.

A major finding from the empirical analysis is that the estimated effects of inflation on
growth and investment are significantly negative when some plausible instruments are used in
the statistical procedures. Thus, there is some reason to believe that the relations reflect
causation from higher long-term inflation to reduced growth and investment. It should be
stressed that the clear evidence for adverse effects of inflation comes from the experiences of
high inflation. The magnitudes of effects are also not that large; for example, an increase in the
average inflation rate by10 percentage points per year is estimated to lower the growth rate of
real per capita GDP (on impact) by 0.2-0.3 percentage points per year.

Over long periods, these changes in growth rates have dramatic effects on standards of
living. For example, a reduction in the growth rate by 0.2-0.3 percentage points per year
(produced on impact by10 percentage points more of average inflation) means that the level of
real gross domestic product would be lowered after 30 years by 4-7%.14 In mid 1995, the U.S.
gross domestic product was over $7 trillion; 4-7% of This amount is $300-500 billion, more than
enough to justify a keen interest in price stability.

Literature reviews from Vikesh Gokal and Subrina Hanif’s working paper, Relationship Between
Inflation and Economic Growth (2004) stated that inflation may have slightly positive effect on
growth:

Non-linear effects of inflation on economic growth by Michael Sarely: There is evidence of


a structural break that is significant. The break is estimated to occur when the inflation rate is 8
percent. Below that rate, inflation does not have any effect on growth or it may even have a
slightly positive effect. When the inflation rate is above 8 percent, however, the estimated
effect of inflation on growth rates is negative, significant, robust and extremely powerful. This
study also demonstrated that when the structural break is taken into account, the estimated
effect of inflation on economic growth increases by a factor of three. The results suggest that
the existence of a structural break also suggests a specific numerical target for policy: keep
inflation below the structural break.

Role of Macroeconomic Factors in Growth by Stanley Fischer: Inflation is significantly


correlated with the growth rate. The simple panel regressions confirm the relationships
between inflation, inflation variability and growth. The growth accounting framework made it
possible to identify the main channels through which inflation reduces growth. The author
pointed out that, in line with past theory and studies, the results of the paper implied that
inflation impacted on growth by reducing investment, and by reducing the rate of productivity
growth. Examination of exceptional cases also showed that while low inflation and small
deficits were not necessary for high growth even over long periods, high inflation was not
consistent with sustained growth.
CHAPTER 3
RESEARCH METHODOLOGY

This chapter discussed the designs and procedures undertaken during the conduct of
the study. It presented the research method used, instrument used, and validation of
instrument, data gathering procedures and statistical treatment of data.

RESEARCH METHOD USED

Descriptive research is a method used in the process of finding adequate and precise
interpretation of the facts presented. The researches employed this research method to
emphasize the problems revolving around the situation rather than simply identifying them. To
define the descriptive type of research, Creswell (1994) stated that the descriptive method of
research is the gathering of information about the present existing condition. The aim of
descriptive research is to verify formulated hypotheses that refer to the present situation in
order to elucidate it. Moreover, this method uses a flexible approach, thus, when important
new issues and questions arise during the duration of the study, further investigation can be
conducted.
The descriptive research is one in which information is collected without changing the
environment Sometimes these are referred to as “ correlational ” or “ observational ” studies.
The Office of Human Research Protections (OHRP) defines a descriptive research as “Any
research that is not truly experimental.” Moreover, it is also conducted to demonstrate
associations or relationships between things in the world around.
A case study on the other hand, is an in-depth study of a particular research problem
rather than a sweeping statistical survey. It is often used to narrow down a very broad field of
research into one or a few easily research examples. The case study research design is also
useful for testing whether a specific theory and model actually applies to phenomena in the
real world. It is a useful design when not much is known about a phenomenon. Since this study
regarding the relationship between the economic growth and the inflation rate is a time series
research, this type of study is the best suit.

INSTRUMENT USED

To gather data that will be subject to different processes to yield meaningful


information that may support or reject the presented hypotheses, the researchers used library
method in researching pertinent data. Through surfing in the internet in various websites of the
government and other reliable non-government organizations, the researchers were able to get
secondary data to be subject for cross-validation.

VALIDATION OF THE INSTRUMENT

The secondary data garnered by the researchers are considered more reliable given the
fact that the sources of these records have already been processed to alleviate fallacies and to
accomplish authenticity.

DATA GATHERING PROCEDURE

The researchers endeavored to look for sufficient data from various websites of the
government such as the National Statistics Commission Board Office and the Bangko Sentral ng
Pilipinas and even the non-government organizations like Trade Economics. Com and
Worldbank.org. The researchers gathered the required data from June up to July of 2014 and
this duration gave them enough time to gather sufficient data.

STATISTICAL TREATMENT OF DATA

To yield meaningful information from the data gathered from various sources that can
lead to the deeper analysis of the processed data, the researchers used the Econometric Views
(EViews). After the data are collected, the researches face the task of converting numbers into
assertions; they must find a way to choose among the hypotheses the one closest to the truth.
Statistical tests are the preferred way to do this, and software programs like EViews make
performing these tests much easier.
EViews organizes data, graphs, output, and so forth, as objects. Each of these objects
used for further analysis. EViews is a powerful program which provides many ways to rapidly
examine data and test scientific hunches. It can produce basic descriptive statistics, such as
averages and frequencies, as well as advanced tests such as time-series analysis and
multivariate analysis. The program also is capable of producing high-quality graphs and tables.
Knowing how to make the program work for you now will make future work in independent
research projects and beyond much easier and more sophisticated.
CHAPTER 4

PRESENTATION, ANALYSIS, AND INTERPPRETATION OF DATA

This chapter presents the findings obtained from the primary instrument used in the
study. It shall discuss the results obtain from the data processed through Eviews to come up
with precise conclusion regarding the problem. In order to simplify the discussions, the
researcher provided tables and graphs.

Presented below is the result from Eviews to answer the question, if there is a
significant relationship between the inflation rate and Gross Domestic Product growth rate in
the short run basis.

Dependent Variable: GDP


Method: Least Squares
Date: 09/12/14 Time: 12:32
Sample: 1 8
Included observations: 8

Variable Coefficient Std. Error t-Statistic Prob.

C 7.164856 2.313059 3.097568 0.0212


IR 0.623446 0.759993 0.820331 0.4434

R-squared 0.100847 Mean dependent var 9.05


Adjusted R-squared -0.049012 S.D. dependent var 0.727029
S.E. of regression 0.744633 Akaike info criterion 2.460467
Sum squared resid 3.326868 Schwarz criterion 2.480327
Log likelihood -7.841867 Hannan-Quinn criter. 2.326516
F-statistic 0.672943 Durbin-Watson stat 0.874288
Prob(F-statistic) 0.443389

The table above shows that R-squared obtain from the short run data is 0.100847 which
means the variance of Gross Domestic Product growth rate can be explain by inflation rate by
10%. This entails that the model has a very small capability to fit and explain the relationship
between the independent variable which is the inflation rate and the dependent variable which
is the Gross Domestic Product growth rate. Inflation’s coefficient is 0.623 connotes that there is
a positive relationship between the two variables but since the r-squared is low, its positive
relationship is less significant. T- statistics probability is 0.44 and is less than 5% which indicate
that the first null hypothesis is rejected, GDP growth rate and inflation rate has significant
relationship and the 0.82 of the T-statistics means that the even there’s a positive relationship
among the two variable, but still it has a minor effect. Moreover, the F-statistics probability,
0.443, which is less than 5%, denotes that the independent variable influence the dependent
variable and since the value of F-statistics is 0.64, inflation rate can influence GDP growth rate
by 64%. Given that the result is significant, the null hypothesis is rejected.

Short Run Model

Estimation Command:
=========================
LS GDP C IR

Estimation Equation:
=========================
GDP = C(1) + C(2)*IR

Substituted Coefficients:
=========================
GDP = 7.16485631323 + 0.623445617782*IR

The table above containing the results obtain shows the model to be used to prove if
there’s a relationship between the inflation rate and Gross Domestic Product growth rate.

IR GDP
3.1 9.097538
2.9 8.972849
3.53 9.365619
2.93 8.991552
3.2 9.159882
2.67 8.829456
2.43 8.679829
3.43 9.303275
After substituting the inflation rate to the model, the result obtain in which was
presented on the previous page show that if there is direct relationship between the
independent and dependent variable it is very little that it is neglected and assume to be less
significant, which proves that there is significant relationship between inflation rate and GDP
growth rate.

Following is the presentation of the table of the long run result processed from data
dated from 1984-2013 through Eviews.

Dependent Variable: GDP


Method: Least Squares
Date: 09/09/14 Time: 16:14
Sample: 1984 2013
Included observations: 30

Variable Coefficient Std. Error t-Statistic Prob.

C 5.950657 0.609033 9.770665 0


IR -0.284225 0.047019 -6.044844 0

R-squared 0.566161 Mean dependent var 3.44


Adjusted R-squared 0.550667 S.D. dependent var 3.639685
S.E. of regression 2.439764 Akaike info criterion 4.686021
Sum squared resid 166.6686 Schwarz criterion 4.779434
Log likelihood -68.29031 Hannan-Quinn criter. 4.715904
F-statistic 36.54014 Durbin-Watson stat 1.78663
Prob(F-statistic) 0.000002

The table shows that the R-squared is .566 which denotes that the model fitted good to
explain the relationship of the independent variable and dependent variable since the result
obtain is near 60% that set as the benchmark of being the best model. T-statistics probability is
zero and is less than 5% percent thus; the second null hypothesis is rejected. The -6.0448 value
of T-statistics tells that the inflation rate negatively explains the GDP growth rate. The
coefficient -.0284 means there is a negative relationship between the inflation rate and GDP
growth rate. On the other hand, the P-value of F-statistics is 0.00002, less than 5%, indicates
that there is a significant relationship between the inflation rate and GDP growth rate and IR
can influence GDP growth rate by 36.54 as stated in F-statistics.

Long run Model

Estimation Command:
=========================
LS GDP C IR

Estimation Equation:
=========================
GDP = C(1) + C(2)*IR

Substituted Coefficients:
=========================
GDP = 5.95065651301 - 0.284225265624*IR

The table shows the model to be used to prove the negative relationship between the
inflation rate and GDP growth rate in the long run.

IR GDP
53.3 -9.198550145
17.6 5.950656513
3 5.097980716
7.5 3.818967021
9.6 3.222093963
9 3.392629122
13 2.25572806
16.5 1.26093963
7.9 3.705276915
6.8 4.017924707
10 3.108403857
7.6 3.790544494
7.7 3.762121968
6.2 4.188459866
22.4 -0.415989437
6.6 4.07476976
5.7 4.330572499
5.5 4.387417552
4.2 4.756910397
3.2 5.041135663
5.5 4.387417552
5.8 4.302149972
4.9 4.557952711
3.1 5.06955819
7.5 3.818967021
2.8 5.154825769
4.2 4.756910397
4 4.813755451
1.9 5.410628508
2 5.382205982

The result obtain by substituting the value of inflation rate indicates that there is a
negative relationship between the inflation rate and GDP growth rate. For instance, if the
inflation rate is 53.33% its equivalent GDP growth rate is -19.20 and if the IR is 1.9% the GDP is
5.41. This result entails that a large increase in the inflation rate gives a large decrease on the
growth rate in the economy. This proves that there is a significant relationship between
inflation rate and Gross Domestic Product growth rate in the long run.
CHAPTER 5

SUMMARY OF FINDINGS AND CONCLUSION

The very purpose of this study is to determine the effect of inflation on economic growth. The
results were accumulated by conducting least-square estimation of inflation and Gross Domestic
Product growth rate through Eviews 7. The main objective has been to indicate whether the general
increase in prices of commodities could or could not hamper the growth of the economy in the short-
run and long-run period. This chapter will report the conclusion reached from the conduct of this
undertaking.

The results suggested that in the long-run, inflation imposes a significant negative effect on GDP
growth rate. When inflation soars, GDP growth rate will be at its bottom. In converse, when inflation
resorts in low level, GDP growth rate will ascend. As it were, Aggregate Demand falls as inflation rises
since it lowers the level of consumer spending, investment and exports.

This assertion was corroborated by reasonably high result of R-Squared, which is 57%, and the
calculation of probability, with 0%, presenting a significant relationship between the variables used,
Inflation and GDP growth rate.

A sustained rise in the general price level can do economic damage by distorting consumption
decisions. Distortions result from households’ and businesses’ uncertainty about inflation’s future
course. Inflation makes goods produced in the Philippines more expensive, towing exports to decrease.
Yet it causes imports to increase by making goods made abroad less expensive. Also, this occurrence
poses a “stealth” threat to investors because it chips away at real savings and investment
returns. Most investors aim to increase their long-term purchasing power. Inflation puts this
goal at risk because investment returns must first keep up with the rate of inflation in order to
increase real purchasing power.

On the other hand, the obtained outcome of the estimation has shown that inflation prompts
substantial growth in the short-run. Having an R-Squared of 10%, it is understood that growth could be
explained by the hike in prices of commodities.
The rationale of this finding could be explained by building up of output, with the producers having
the myopia that they will be gaining more, believing that prices of products would be high.

In conclusion, the researchers were able to recognize the weight of inflation rate to both short-run
and long-run period in the Philippine context. Though the said phenomenon was proven not to be on
the way of attaining growth in the short-run, inflation should still be controlled for it deteriorates
progress in the long-run.