INTRODUCTION

Real Gross Domestic Product (real GDP) is a macroeconomic measure of the

value of economic output adjusted for price changes (i.e., inflation or deflation).This
adjustment transforms the money-value measure, nominal GDP, into an index for
quantity of total output. GDP is the sum of consumer Spending, Investment made by
industry, Excess of Exports over Imports and Government Spending.

Monetary policy is still used as a means of controlling a national economys
cyclical fluctuations. Monetarists such as Harry G. Johnson, Milton Friedman and
Friedrich Hayek explored the links between the growth in Money supply and the
acceleration of inflation. They argued that tight control of money supply growth was a
far more effective way of squeezing inflation out of the systems then were demand
management policies.

Simply stated, monetary policy influences economic activity, specifically by
manipulating the supplies of money and credit and by altering rates of interest. As
such, changes in the money supply induce changes in aggregate demand.

The level of economic activity is a result of interplay of demand and supply force
in three markets the commodities, are traded wherein financial institutions, central
bank, the treasury, and the public play important roles. Whatever decisions were
made by these actors in the financial sector tend to influence money supply and
eventually the level of economic activities. In fact, Monetarists do not only argue that
money is important but the key is aggregate demand and the level of economic
performance. Its monetary rule states that a steady increase in money supply permits
aggregate demand to expand in line with the growth of productive capacity.[4][5]

Keynesians also postulate that a change in money stock relative to its demand
results to change in interest rate. Interest rate determines level of investment
consequently investment being part of aggregate demand, will affect the level of
economic activity. However, investment tends to be insensitive to changes in interest
rate hence reduces the effectiveness of monetary policy in influencing level of output
or income.[5]

Objective of the study
The objective of the study was to formulate mathematical models through regression
analysis using matrices to measure the influence of Money Supply and Cost of Credit
in Real Gross Domestic Product.
RESEARCH PARADIGM
Independent Variables Dependent Variables



Money Supply
Cost of Credit
Real Gross Domestic Product
The researchers used the variables shown in the figure to make model that measures
impact. Significant relationship among variables were obtained after some verification.
Multiple Linear Regression using matrices was used to make model.
Statement of the Problem
This study is conducted to formulate mathematical model through regression analysis
using matrices to measure the influence of Money Supply and Cost of Credit in Real
Gross Domestic Product. In particular, the point of the study was to answer the
following questions:

1. What has been the behavior of real gross domestic product, money supply, and
domestic interest rate (cost of credit) in the Philippines from 2000-2013?
2. Is real GDP significantly related to money supply, and domestic interest rates
(cost of credit)?
3. Is real GDP significantly affected individually and collectively by money supply,
and domestic interest rate (cost of credit)?
4. How stable is the relationship between real GDP, money supply, and domestic
interest rates (cost of credit) in the Philippine economy?
5. Is there a significant difference between Predicted Value and Actual Value?

Scope and delimitation
The researchers limit this study only to economic indicator with a possible affect to
output growth in Philippines. The data were gathered from the Bangko Sentral ng
Pilipinas[7] and National Statistical Coordination Board[8]. The researchers formulate
regression model using matrices by considering independent variables like Money
Supply and Cost of Credit recorded within 2000 to 2013.

REVIEW RELATED LITERATURES
This portion represents a review of several literatures that would be advantageous to
the study summarized from the previous writings, divulging through facts asserted by
few people and pioneer in the field of applied mathematics.
According to Michael T. Belongia [2] in year 2012, he cited that based on the his
research, it generated cast doubt on the adequacy of conventional models that focus
on interest rates alone and also highlight that all monetary disturbances have an
important Quantitative component, which is captured by movements in a properly
measured by monetary aggregate.
In year 2010, Bigyan Shrestha [1] studied the effect of Money Supply on GDP and
Price in Nepal. But in their case it is found that, the price is not affected by money
supply, but the money supply is caused by price level, for the analyzed data for 1980
to 2009. This may have been the effect of formation of monetary policy based upon the
existing price level and setting the targets.
In February 2014, Peter N. Ireland[3] made a research to develop an affine model of
the term structure of interest rates in which bond yields are driven by observable and
unobservable macroeconomics factors. It highlights a broad range of channels through
which monetary policy affects risk premia and the economy, risk premia affect
monetary policy and the economy and economy affects the monetary policy and risk
premia.
Maria Socorro Gochoco-Bautista, in his study, attempt to understand how monetary
policy is conducted today, if and how it differs from the manner it was conducted in
the past, whether monetary authorities are faithful to the tenets of the theories they
say underlie their framework, and whether any lessons have been learned at least
since the onset of the Asian financial crisis.
According to Browne and Cronin, the underlying theme of their paper published in a
Cato Journal is that advances in electronic payments, in conjunction with innovations
in financial products would appear capable of delivering a laissez-faire banking system
that would be both inherently stable and beneficial to macroeconomic performance.
Hafer and Kutan tested whether financial innovations in the Philippines distorted
long-run relation between real money balance, income and interest rates. They
concluded that they cannot reject the hypothesis that a standard money demand
relation between M1 and M3, real income, and interest rates does not exist. This
evidence supports the Philippine central banks choice of monetary aggregates as its
policy instrument to achieve its policy objectives.

Research Methodology
Multiple linear regression attempts to model the relationship between two or more
explanatory variables and a response variable by fitting a linear equation to observed
data. Every value of the independent variable x is associated with a value of the
dependent variable y.

Assumption for Normality
Jarque Bera test used to check hypothesis about the fact that a given sample xS is a
sample of normal random variable with unknown mean and dispersion.

Ho: The data is normal
Ha: The data is not normal

Assumption for Linearity
Wald Test - The estimates of the coefficients and the intercepts in logistic regression
(and any GLM) are found via maximum-likelihood estimation (MLE).
W=(^0)se(^)N(0,1)
Ho: The data is linear
Ha: The data is not linear

Assumption for Multicollinearity
Variance Inflation Factor - are a measure of the multi-colinearity in a regression
design matrix
Var(

= 1/1-

Range: 1-10
Test of Independence
Durbin Watson test - A test that the residuals from a linear regression or multiple
regression are independent.

d =
(

Range:1.5 -2.5
Assumption for Heterschedasticity
White heteroschedasticity - is a statistical test that establishes whether
the residual variance of a variable in a regression model is constant: that is
for homoscedasticity.

Ho: The variance are equal
Ha: The variance are not equal
Chow breakpoint test
The Chow test is a statistical and econometric test of whether the coefficients in
two linear regressions on different data sets are equal.

Ho: coefficients are stable or coefficients are not different
Ha: coefficients are different
Paired t-Test
Given two paired sets and of measured values, the paired -test determines
whether they differ from each other in a significant way under the assumptions that
the paired differences are independent and identically normally distributed.
To apply the test, let








then define by


This statistic has degrees of freedom.


Results and Discussion
The behavior of real gross domestic product, money supply, and domestic
interest rate (cost of credit) in the Philippines from 2000-2013 and the data series on
this variables are shown in TABLE 1(see appendix ). Using compound growth formula
(see appendix ), Real GDP has grown annually by 5.41% from 2000-2013, for the last
12 years. While Real output has trended upward, it was evidently characterize by
seasonality. It can be observed that RGDP increase every 4
th
quarter and decrease the
following quarter of the year.









Money supplys rate of growth was estimated at 13.20%, although this is in
nominal terms. Money supply also increased every fourth quarter of the year but not
followed by a declining trend.

Cost of credit has a declining phase base on the data we have gathered. It
shows a positive effect on the economy. When the cost of credit is lower, there would
be massive investors who will build up different businesses.
The relationship of Real GDP and Money Supply is directly proportional. As
Money Supply increases, Real GDP also increases. This is parallel with the statement
of the monetarist that Supply on the market dictates the Output rate on the economy.
The relationship of Money Supply and Cost of Credit is inversely proportional.
As Money Supply increases, Cost of Credit decreases. This is alike to the demand and
supply law. It means that as if there is more money, the cost of borrowing money is
less because of the demand for money decreases. This is shown on the data we have
presented on the appendix.
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Money Supply
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Real GDP
5
6
7
8
9
10
11
12
13
14
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Cost of Credit
We state that Money supply is increasing as time pass by. The effect of this
situation on the Cost of Credit is opposite. As the money supply increases, interest
rate decreases and vice versa. But there are other factors that dictates interest rate or
cost of credit (namely: demand on money supply, inflation, monetary policy etc.) that
may affect the interest rate to increase even though money supply increases. In the
graph of money supply and Interest rates, we can see that money supply slopes
upward while Interest rate slopes downward. In this data, we are more concerned with
the relationship of M2 and Interest Rates.
Table 2
Correlation
Pearson P-Value
RGDP vs Money Supply 0.958 0.000 Significant
RGDP vs Cost of Credit -0.841 0.000 Significant
Money Supply vs Cost of Credit -0.881 0.000 Significant


Real GDP is significantly related to money supply and cost of credit. P-Value <
0.01(alpha) means to Reject Ho therefore there is a significant relation between the
variables. Increase or decrease in one of these variable do significantly relate to
increases or decreases in the other variable. In our data we generated negative
Pearsons value in Cost of credit which means increase of these variable, decreases
the other variables.


Regression results

The least squares estimating equations (XX)b = Xy
[



] [

] [

]

And then, using the relation (

, the estimated regression coefficients are obtained as

The coefficients were obtained using MATLAB. Therefore, the mathematical model is as
follows:
RGDP =

Real GDP is significantly affected individually and collectively by money supply,
and Cost of Credit.

The regression shows that money supply with a P-Value of 0.0000 which is less
than alpha(0.05) has a significant effect to the model while domestic interest rate(cost
of credit) with a probability of 0.8882 which is greater than alpha has no significant
effect to the model.

The regression also shows a 2.143 Durbin Watson statistic result means that
the test of independence is accepted by the given range of acceptance.
Conclusion

Based on the findings, the following conclusions are drawn:

1. Although characterized by marked seasonality, real GDP rose in tandem with
money supply, both in absolute and relative terms. As the RGDP, M2 increases,
only Cost of Credit decreases. It is because theres an inverse relationship
between money supply and cost of credit. If theres a lower domestic interest
rate, it can attract investors. So as the investment increases, supply of money
also increases.
2. RGDP has a statistically significant relationship between Money Supply, Cost of
Credit and Number of Financial Institutions. Increase or decrease in one of
these variable do significantly relate to increases or decreases in the other
variable. In our data we generated negative Pearsons value in Cost of credit
which means increase of these variable, decreases the other variables.
3. The empirical results indicate that money supply has a very significant
influence on output growth while cost of credit show no significant effect on
output growth. The effects of money supply, and cost of credit tend to agree
with the theoretical expectation of having a impact on output growth.
4. There is a structural break detected in the model. This is shown by the
declining cost of credit of the data. This result indicates that the model is not
suitable for use in policy information and forecasting.

5. Based on paired t-test, P-Value is > 0.01 meaning the model can predict the
values of RGDP.

Recommendation

The researchers propose looking for other independent variables like
Investment, Stock Markets and Financial Institution to assess a better possible
outcome that can affect the dependent variable(RGDP).







Reference
Books and Online Resources
[1] Bigyan Shrestha, Impact of Money Supply on GDP and Price, Study of
Nepal,
[2] Michael T. Belongia, The Barnett Critique After Three Decades: A New
Keynesian Analysis, University of Mississippi
[3] Peter N. Ireland,The Macroeconmics Effects of Interest on Reserves,
Boston College and NBER
[4] Pierce, James L. and John Willy & Sons, Monetary and Financial
Economics, New York, 1984
[5] Cargill, Thomas F., Money, The Financial System and Monetary Policy, 2
nd

Edition, Prentice Hall, 1983
[6] Mishkin, Fredericks S., The Economics of Money, Banking and Financial
Economics, New York, 1984

Government Agencies
[7] Bangko Sentral ng Pilipinas
[8] National Statistics Coordination Board











Appendix
Table 1
Real GDP, M2, Cost of credit
1
st
Quarter of 2000 to 2
nd
Quarter of 2013


Period


Money
Supply


Real GDP
Domestic Interest
Rate
(Cost of Credit)
2000:Q1 335,816 842,436 10.345
Q2 343,672 874,688 10.315
Q3 341,084 889,137 10.938
Q4 361,881 974,474 11.041
2001: Q1 371,034 863,259 12.260
Q2 382,383 900,956 12.213
Q3 361,035 913,039 12.007
Q4 363,870 1,007,086 13.126
2002: Q1 383,624 890,693 10.833
Q2 414,566 936,709 8.957
Q3 415,610 937,391 8.128
Q4 449,282 1,053,874 8.621
2003: Q1 452,667 933,194 8.433
Q2 456,425 981,777 10.065
Q3 451,797 986,863 9.43
Q4 486,062 1,106,635 9.625
2004: Q1 499,895 1,001,203 9.627
Q2 514,727 1,057,384 9.854
Q3 496,406 1,044,249 10.414













Table 3

Regression of RGDP on Money supply and Cost of credit

Dependent Variable: RGDP
Method: Least Squares
Date: 03/25/14 Time: 16:18
Sample: 2000Q1 2013Q2
Included observations: 54


Variable Coefficient Std. Error t-Statistic Prob.


Q4 534,225 1,174,104 10.421
2005: Q1 549,416 1,045,576 10.085
Q2 567,355 1,111,438 10.15
Q3 566,663 1,089,848 10.233
Q4 594,703 1,234,417 10.271
2006: Q1 600,493 1,101,758 9.858
Q2 635,282 1,169,901 9.982
Q3 640.521 1,143,289 10.099
Q4 705,737 1,301,183 9.176
2007: Q1 767,466 1,171,255 8.835
Q2 841,649 1,258,385 8.313
Q3 806,338 1,215,811 9.036
Q4 834,834 1,382,837 8.582
2008: Q1 844,226 1,217,869 8.43
Q2 891,724 1,313,024 8.267
Q3 911,802 1,280,042 8.875
Q4 1,002,751 1,426,165 9.433
2009: Q1 1,032,468 1,229,618 9.434
Q2 1,059,162 1,334,449 8.544
Q3 1,090,398 1,286,674 8.039
Q4 1,157,948 1,446,499 8.248
2010: Q1 1,194,185 1,333,040 7.885
Q2 1,240,369 1,453,390 7.742
Q3 1,217,123 1,380,231 7.646
Q4 1,279,845 1,534,877 7.417
2011: Q1 1,328,290 1,393,979 6.832
Q2 1,332,280 1,499,915 6.555
Q3 1,333,962 1,422,219 7.016
Q4 1,417,321 1,592,887 6.250
2012: Q1 1,442,488 1,484,821 6.071
Q2 1,447,349 1,594,682 5.706
Q3 1,443,332 1,526,622 5.485
Q4 1,524,804 1,705,545 5.456
2013:Q1 1,654,700 1,599,239 5.920
Q2 1,790,916 1,716,269 5.874
Annual Growth Rate 13.201% 5.413% -4106%
C 737577.0 137792.8 5.352797 0.0000
M2 0.560838 0.049313 11.37296 0.0000
DIR 1591.590 11261.02 0.141336 0.8882


R-squared 0.917177 Mean dependent var 1210498.
Adjusted R-squared 0.913929 S.D. dependent var 240220.1
S.E. of regression 70475.51 Akaike info criterion 25.21787
Sum squared resid 2.53E+11 Schwarz criterion 25.32837
Log likelihood -677.8825 Hannan-Quinn criter. 25.26049
F-statistic 282.3848 Durbin-Watson stat 2.143560
Prob(F-statistic) 0.000000



Assumption for Normality
An examination of the normality of regression residuals bases on the
Jarque-Bera statistic confirms that the residuals are more or less normally
distributed. This is shown in Figure 7.

The Jarque-Bera statistic of 2.571 and probability of 0.276 which
indicate that p-value > 0.05(alpha) is well within the region of acceptance in the
null hypothesis of the data are normally distributed cannot be rejected. In
other words rejection residuals are normally distributed.

Figure 7
Normality Test -Histogram

Ho: the data is normal
Ha: the data is not normal



Test of Constancy of Variance
0
2
4
6
8
10
-100000 -50000 0 50000 100000 150000
Series: Residuals
Sample 2000Q1 2013Q2
Observations 54
Mean 1.49e-10
Median -944.0493
Maximum 163394.0
Minimum -102021.8
Std. Dev. 69133.00
Skewness 0.493764
Kurtosis 2.590586
Jarque-Bera 2.571374
Probability 0.276461
The validity of tests of significance of the regression parameters also
depends upon the constancy of regression variance. To find out is this
assumption is fulfilled by the model, the White Heteroskedasticity test is
applied. the result of the test are exhibited in table 4. The f ratio of 0.230 has a
probability of acceptance of 0.947[P value > 0.05(alpha)]. This means that the
null hypothesis that homoscedastic (constant variance) is accepted.

Table 4
White Heteroskedasticity Test

Heteroskedasticity Test: White


F-statistic 0.230488 Prob. F(5,48) 0.9474
Obs*R-squared 1.266096 Prob. Chi-Square(5) 0.9384
Scaled explained SS 0.898145 Prob. Chi-Square(5) 0.9704



Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Date: 03/25/14 Time: 16:19
Sample: 2000Q1 2013Q2
Included observations: 54


Variable Coefficient Std. Error t-Statistic Prob.


C -1.15E+10 1.04E+11 -0.110052 0.9128
M2 12758.60 75768.88 0.168388 0.8670
M2^2 -0.004590 0.015519 -0.295737 0.7687
M2*DIR -155.8436 6180.113 -0.025217 0.9800
DIR 1.56E+09 1.73E+10 0.090281 0.9284
DIR^2 -40178222 7.12E+08 -0.056438 0.9552


R-squared 0.023446 Mean dependent var 4.69E+09
Adjusted R-squared -0.078278 S.D. dependent var 5.97E+09
S.E. of regression 6.20E+09 Akaike info criterion 48.03824
Sum squared resid 1.85E+21 Schwarz criterion 48.25924
Log likelihood -1291.033 Hannan-Quinn criter. 48.12347
F-statistic 0.230488 Durbin-Watson stat 2.626248
Prob(F-statistic) 0.947355


Ho: The Variance are equal
Ha: The Variance are not equal


Assumption For Multicollinearity

Variance inflation factors is used to test the multicollinearity of the
model. As shown in Table 5, VIF of 2.19, 8.44, and 6.20 are within the range of
acceptance.

Table 5
Variance Inflation Factors

Variance Inflation Factors
Date: 03/25/14 Time: 18:14
Sample: 2000Q1 2013Q2
Included observations: 54


Coefficient Uncentered Centered
Variable Variance VIF VIF


C 1.90E+10 206.4289 NA
M2 0.002432 22.14960 4.463440
DIR 1.27E+08 114.4896 4.463440


Range: VIF must be 1-10

Structural Stability of Model

An important characteristic of a model is the absence of structural break.
is such break is present, the regression parameters are unstable and the
resulting model cannot be utilized for policy formulation and forecasting. To
detect whether such structural instability is present, the Chow Breakpoint Test
was used and the results are summarized in Table 6 below.

Using Chow Breakpoint for stability test, Ho: coefficients are stable or
coefficients are not different. Here in this case, P-value is 0.0004 less than 0.05
means that Ho are rejected. Shows that the residual of the regression using
quarterly data from 2007 to 2013 vary significantly with the residual of the
regression from 2000 to 2006 and therefore structural instability is present or
there is structural break in the data. This result indicates that the model is not
suitable for use in policy formulation and forecasting.


Table 6
Chow Breakpoint Test

Chow Breakpoint Test: 2006Q3
Null Hypothesis: No breaks at specified breakpoints
Varying regressors: All equation variables
Equation Sample: 2000Q1 2013Q2


F-statistic 7.286541 Prob. F(3,48) 0.0004
Log likelihood ratio 20.26549 Prob. Chi-Square(3) 0.0001
Wald Statistic 21.85962 Prob. Chi-Square(3) 0.0001


Ho: The coefficients are stable or coefficients are not different
Ha: The coefficients are different

Assumption for Linearity
Wald test is usedto satisfy the assumption of linearity. Based on the
results presented in Table 7, the data tend to accept the null hypothesis which
means that the data is linear.

Table 7
Wald Test

Wald Test:
Equation: Untitled


Test Statistic Value df Probability


t-statistic 5.359215 51 0.0000
F-statistic 28.72119 (1, 51) 0.0000
Chi-square 28.72119 1 0.0000



Null Hypothesis: C(1) = 0
Null Hypothesis Summary:


Normalized Restriction (= 0) Value Std. Err.


C(1) 738043.6 137714.9


Restrictions are linear in coefficients.

Ho: The data is linear
Ha: The data is not linear

Paired t-test

Hypothesis Testing for Actual and Predicted Vaues of RGDP
Date: 04/15/14 Time: 17:22
Sample: 2000Q1 2013Q2
Included observations: 54
Test of Hypothesis: Mean = 0.000000


Sample Mean = -3.54e-11
Sample Std. Dev. = 69118.23

Method Value Probability
t-statistic -3.77E-15 1.0000



Ho: There is no significant difference
Ha: There is a significant difference