The Impact of Inflation on Exchange Rate Depreciation in the Philippines: A Systematic Review

Abstract

Background: Inflation and exchange rate depreciation are critical macroeconomic variables that significantly influence economic stability, particularly in emerging and developing economies. Understanding their dynamic relationship is essential for effective monetary policy formulation. Despite extensive empirical work, findings remain fragmented due to differences in methodologies, country contexts, and analytical frameworks.

Objectives: This study aimed to systematically review and synthesize existing empirical literature on the relationship between inflation and exchange rate depreciation, with a focus on identifying key determinants, transmission mechanisms, and policy implications across different economic contexts.

Methods: A systematic review methodology was employed following the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) guidelines. A comprehensive search was conducted across multiple academic databases, including ScienceDirect, Wiley Online Library, SpringerLink, ProQuest, Sage Journals, Taylor & Francis, JSTOR, and Google Scholar. A total of 187,773 records were initially identified, with 14 studies meeting the final inclusion criteria after screening and eligibility assessment. Data extraction was conducted using a structured framework, and study quality was assessed using the Joanna Briggs Institute (JBI) Critical Appraisal Tool. Data synthesis was performed using the Synthesis Without Meta-Analysis (SWiM) approach.

Results: The findings consistently indicate a significant relationship between exchange rate movements and inflation across different economies. Exchange rate pass-through (ERPT) was identified as a key mechanism through which currency depreciation influences inflation, often exhibiting asymmetric effects (Pham et al.; Pham et al.). Oil price shocks and global economic factors were also found to be major drivers of inflation dynamics (Karlsson & Månsson, 2024; Finck & Tillmann). Several studies highlighted the role of domestic macroeconomic variables such as money supply, policy rates, and government expenditure in shaping inflation trends (Pama et al.; Urrutia et al.). Advanced econometric and machine learning models, including NARDL, VAR, and neural networks, demonstrated improved forecasting accuracy and deeper insights into inflation-exchange rate interactions (Urrutia et al.; Anderl & Caporale, 2023). Additionally, global shocks, monetary policy spillovers, and market expectations were found to significantly influence both inflation and exchange rate behavior (Tran & Nguyen, 2024; Beckmann & Czudaj).

Conclusion: The review highlights that inflation and exchange rate depreciation are closely interconnected, driven by both domestic and global factors. The variability in results across studies underscores the importance of context-specific policy responses and the adoption of robust analytical models. Policymakers should consider exchange rate stability, external shocks, and macroeconomic fundamentals in designing effective inflation-targeting strategies. Future research should further explore nonlinear dynamics and integrate advanced predictive models to enhance policy relevance and forecasting accuracy.