The Long-run Relationship among World Oil Price, Exchange Rate and Inflation in the Philippines

This study was conducted to determine the long-run relationship among world oil price (WOP), Philippine inflation rate (IR) and exchange rate (ER). Results of the Augmented Dickey Fuller (ADF) tests of the variables revealed that all three series are not stationary in the process and were subjected to first differencing. ADF further revealed that the three series are integrated of order 1 or I(1). Therefore, vector error correction model (VECM) was used to examine the relationship of the three variables. VECM revealed a positive long-run relationship between IR and WOP, and IR and ER. A unit increase of the world oil price will increase Philippine inflation by 0.31%. While, a unit increase in exchange rate (PhP: USD) will increase inflation rate by 0.42%. In terms of ER, results revealed that an increase in the past values of WOP will increase ER. However, ER is not affected by the past values of IR. Result of the granger causality shows that all of the other variables jointly granger cause and individually granger cause inflation rate. Changes in ER cannot be predicted by joint and individual changes in the previous periods of WOP and IR.