Applied Economics Letters

ISSN: (Print) (Online) Journal homepage: https://www.tandfonline.com/loi/rael20

Is rice price a major source of inflation in the

Philippines? A panel data analysis

Harold Glenn Valera, Jean Balié & Emiliano Magrini

To cite this article: Harold Glenn Valera, Jean Balié & Emiliano Magrini (2021): Is rice price a
major source of inflation in the Philippines? A panel data analysis, Applied Economics Letters, DOI:
10.1080/13504851.2021.1946470

To link to this article: https://doi.org/10.1080/13504851.2021.1946470

Published online: 25 Jun 2021.

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APPLIED ECONOMICS LETTERS
https://doi.org/10.1080/13504851.2021.1946470

Is rice price a major source of inflation in the Philippines? A panel data analysis
Harold Glenn Valeraa, Jean Balié a
and Emiliano Magrinib
a
Agri-Food Policy Platform, International Rice Research Institute, Los Baños, Philippines; bAgricultural Development Economics Division, Food
and Agriculture Organization, Rome, Italy

ABSTRACT KEYWORDS
We estimate a panel vector auto-regression model using monthly prices for 17 regions in the Inflation; rice price;
Philippines from 2007 to 2019. Our results suggest that the effect of rice price on inflation is larger remittance; Philippines
than the effect of fuel price and remittances. The results obtained are robust to various model
specifications, different sub-periods, and inflation proxies. The impulse response functions for sub-
samples of regions show two remarkable results. First, the response of inflation to a rice price shock
varies according to poverty incidence by region. Second, the magnitude and persistence of this
effect are larger for regions with high poverty rates. These results suggest that the Central Bank
should keep alert in monitoring and assessing key developments in rice prices and supply.

I. 1. Introduction diverse price adjustment processes across regions,

which are useful for regional convergence analysis
The literature on inflation dynamics extensively
(Mehrotra, Peltonen, and Rivera 2010). Third, as
covers the role played by food prices, using aggre­
inflation trends may not fully capture institutional
gated index at national level. These studies include
differences by region, inflation differentials might
the inflationary effects of rising international food
account for structural rigidities that could lower
prices (Durevall, Loening, and Birru 2013), agricul­
each region’s capacity to adjust to shocks.
tural commodity prices (Tule, Salisu, and
We find ample evidence of a larger inflationary
Chiemeke 2019), and the impact of monetary pol­
effect of rice price shocks than fuel price and remit­
icy on food inflation (Iddrisu and Alagidede 2020).
tances. The estimation results across regions with
However, very few studies focus on the effect of
different poverty rates show that the responses are
commodity-specific price shocks and the heteroge­
positive across all groups but the intensity is stron­
neous consequences in terms of inflation at regio­
ger where poverty is higher. The rest of the paper is
nal level. This paper attempts to fill that gap by
organized as follows. Section 2 discusses the meth­
examining the effects of rice price on regional infla­
odology and data. Section 3 presents the findings.
tion in the Philippines using the panel vector auto-
Section 4 concludes.
regression (PVAR) model developed by Love and
Zicchino (2006). This model allows us to capture
unobserved individual heterogeneity for the entire II. Econometric methodology
series by introducing fixed effects that enhances the
To investigate the effects of rice price and addi­
coherence and consistency of the estimation.
tional relevant variables, we estimate the following
Research on this area is useful for monetary
PVAR:
policy in a country as geographically diverse as
the Philippines for three reasons. First, rice is the Xit ¼ AðLÞXit 1 þ μi þ εit (1)
country’s main staple and takes a high share in total
consumption. Therefore, analysing volatile rice where Xit is a vector of endogenous variables, AðLÞ
prices rather than total food prices will directly is a matrix polynomial in the lag operator, and μi is
hinge on inflation targeting by the central bank. a vector of region specific effects. Xit includes the
Second, regional inflation differences may reflect growth rate (log-differences) of the following four
endogenous variables: consumer price index ðπÞ,

CONTACT Jean Balié balie.jean@gmail.com

© 2021 Informa UK Limited, trading as Taylor & Francis Group
2 H. G. VALERA ET AL.
rice price, fuel price, and remittances. We include
the last two variables in estimating Eq. (1) as higher
petroleum excise taxes raise fuel prices while the real
wealth boost from remittances stimulates consump­
tion spending. Thus, both these channels induce
inflation. Finally, εit denotes the vector of residuals.
Following Love and Zicchino (2006), we esti­
mate equation (1) using a PVAR model which
removes the panel-specific fixed effects using for­
ward orthogonal deviation (i.e. Helmert transfor­
mation). The coefficients are estimated by the
generalized method of moment (GMM) using the
first four lags of the regressors as instruments. The
impulse-response functions (IRFs) are computed
from the estimated PVAR coefficients. We use the
Choleski decomposition of the variance–covar­
iance matrix of residuals to isolate the response of
inflation to orthogonalized impulses of the other
variables in the vector Xit . Since the ordering of the
variables in this case is important for interpreting
the results, we arrange them in descending order
based on their degree of exogeneity: remittance,
fuel price, rice price, and inflation. We also con­
sider alternative orderings to ensure that our
results are not driven by the chosen system repre­
sentation. The results show that the IRFs are robust
to the different causal specifications. The confi­
dence intervals of the IRFs are constructed using
Monte Carlo simulations.
We use a balanced dataset for 17 regions from
2007M1 to 2019M9. Monthly data on CPI, fuel
price and proxy for remittances1 are from the
Rice price → π
Figure 1. Orthogonalized IRFs from estimated PVAR for the entire period 2007M1–2019M9. The 95% confidence intervals are based on
200 Monte Carlo simulations.
1
We use quarterly regional data on savings deposit and share of savings to remittances as a proxy for remittances. Monthly observations are interpolated using
the RATS Distribute procedure.
2
We performed the Granger causality Wald tests, and checked the stability condition of all estimates.
Philippine Central Bank. Data on retail price of
regular milled rice are from the Philippine
Statistics Authority. Unit root test results (not
reported here for brevity) indicate that the data
are stationary after first differencing and are not
cointegrated. Thus the model estimation uses first-
differenced data. We use an optimal lag length of
one month based on the BIC in the PVAR. Full
results are available in online appendix.
III. Empirical results
Figure 1 shows the response of inflation to a unit
shock in the growth of rice price (left), fuel price
(middle) and remittances (right) for a period of
10 months.2 The significant positive inflation
response to a rice price shock peaks after one
month and then drops over five months. This is
relatively larger and more persistent than the
effects of the other determinants. The positive and
significant effect of fuel price shock on inflation
lasts for three months. Remittances have an
immediate negative impact on inflation, which
depends on whether the Central Bank offsets or
sterilizes remittances to prevent inflation.
Next, we conduct several robustness analyses by:
a) extending the PVAR with the inclusion of prices
of bread and cereals, and corn; b) including food
price index; and c) estimating Eq. (1) for the
2009M1-2017M12 sub-period to address potential
structural break due to the 2007–2008 rice price
crisis and rising inflation in 2018. The rice export
Fuel price → π Remittance → π

Rice priceA → π
Rice priceB → π
Rice priceC → π
Figure 2. IRFs computed from estimated PVAR using: (A) an extended model (including prices of bread and cereals, and corn); (B)
including food price index; and (C) sub-period 2009M1-2017M12.
restrictions by India and Vietnam in 2007 and the
Philippine National Food Authority’s rice import
tenders for Vietnamese rice imports in early 2008
all contributed to sharp increases and high volati­
lity in the world’s rice prices during those periods.
The IRFs shown in Figure 2 (panel A and B) indi­
cate that there is no significant change in the direc­
tion and extent of inflation response to rice price,
fuel price and remittances after including prices of
bread and cereals, corn, and food price index. This
confirms our initial assumption that using com­
modity-specific price shocks in the Philippine con­
text improves the interpretation of the results more
than using aggregated food price indices. Figure 2
3
Regions are categorized based on level of poverty incidence (see online Table 4).
APPLIED ECONOMICS LETTERS 3
Fuel priceA → π RemittanceA → π
Fuel priceB → π RemittanceB → π
Fuel priceC → π RemittanceC → π
(panel C) also shows that a positive effect of rice
price and fuel price on inflation only peaks in the
first and second month, respectively, while remit­
tance has an immediate negative effect on inflation.
To further check the consistency of the results
based on the pooled sample, we estimate Eq. (1)
across sub-samples of regions3 separately based on
their level of poverty incidence since higher inflation
threatens the welfare of the poor. Once again, we
find (Figure 3) strong evidence that rice price and
fuel price have significant inflationary effects for all
poverty groups. Remittance shock still has an
immediate negative effect on inflation for all poverty
groups. The high heel-shaped inflation responses to
4 H. G. VALERA ET AL.
Rice priceC → π
Rice priceB → π
Rice priceA → π
Figure 3. IRFs computed from estimated PVAR for: (A) High-poverty; (B) Middle-poverty; and (C) Low-poverty incidence groups.
rice prices (Figure 3) mostly align with our baseline
results. However, we do observe some variations in
the dynamics of this response across poverty groups.
Specifically, the degree and persistence of the infla­
tionary effect of rice prices is much larger for the
high poverty group than their counterparts. The
inflationary effect of rice price gradually returns to
the baseline over five months for the high poverty
group while it drops relatively faster in the second
and third month for the other poverty groups.
To sum up, we observe that higher rice price is
associated with higher inflation, and this relation­
ship holds across regions belonging to different
poverty incidence categories. The inflationary
effect of higher rice prices makes the inflation
4
The Central Bank does not currently intervene to offset the effects of remittances on money supply.
Fuel priceC → π RemittanceC → π
Fuel priceB → π RemittanceB → π
Fuel priceA → π RemittanceA → π
targets challenging to achieve and carries substan­
tial welfare risk for the poor (Balié, Minot, and
Valera 2021). In 2018, the Philippines experienced
severe typhoons and an untimely surge in rice
imports, leading to a drop in rice supply and rising
inflation. The policy rate hikes by the Philippine
Central Bank4 in 2018 were not intended to address
food price developments. Such a monetary policy
response operates with a lag before inflation even­
tually tapered off in the early part of 2019.
IV. Conclusion
We estimate a PVAR model using monthly data
for 17 regions between 2007–2019 to identify

the dynamic relationship of inflation with rice
price, fuel price and remittances. We find that
the inflation responses to rice price and fuel
price shocks support the conventional view.
Compared to prior studies focusing on the effect
of rising food prices and the associated mone­
tary policy stance, we show that response of
inflation to rice exhibits an unambiguous pat­
tern across regions characterized by different
level of poverty incidence. Moreover, the effect
of rice price on inflation is significantly larger
than the effect of fuel price. We further find that
a remittance shock barely generates any infla­
tionary effect. Future research could further
focus on the regional differences, and include
a broader measures of money supply, either as
part of or distinct from remittances.
Appendix. Supplementary materials related to this article can
be found online at https://drive.google.com/file/d/
1jbvGbKwScLWI-lWkP2AROiK5UnwHtNxG/view?usp=
sharing
Disclosure statement
No potential conflict of interest was reported by the
author(s).
APPLIED ECONOMICS LETTERS 5
ORCID
Jean Balié http://orcid.org/0000-0003-3872-5982
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