EXCHANGE RATE FLEXIBILITY
AND INTERVENTION 1973-1981
POLICY IN THE PHILIPPINES,
Filologo
Pante,
STAFF PAPER SERIES
PHILIPPINE
INSTITUTE February
Jr.
NO. 83-01
FOR DEVELOPMENT STUDIES 1983
EXCHANGE
RATE FLEXIBILITY
POLICY
this relates
involving
namely:
(1) the effects
exchange
rates by industrialized
exchange
rate flexibility
manners
the exchange
generalized
rate reform.
of major
Section
during
peso-dollar the
period
during the earlier the
framework
rates_
a brief
of
greater
period
nominal
of more
This paper
to evaluate,
historical
no doubt during
perspective
and analyzes country's
deals
flexlble of primarily
in a limited the period of
of adjustable exchange
rate
structural
rate
Changes in the
and speculative are
par values. rate changes
exchange
characteristics
rate regime.
flexibility
and real effective
on the 1970 exchange
the post-1970
rate are examined, exchange
for analyzing
Quarterly
themselves. I
as
two aspectsl
and (2) the implications
its choice of ezchange
exchange
floating
currencies.
some of the
highlighting
(LDC's) have
of the Philipplnes
2 describes
which can help explain nominal
in LDCts
currency
of the adoption
countries;
it attempts
i provides
Jr,*
countries
on LDC economies
experience
floating
Section
system,
issue,
Pants,
the system of generalized
to the less developed
with the second
1973-1981
IN TEE PHILIPPINES,
Filologo
Discussions
AND INTERVEF_ION
pressures
compared
to
those
Section
3 introduces
in a world
of floating
exchange
rates are calculated
* President, Philippine Institute for Development _tudiea, _ completed research on this paper while visiting the Economic Growth Center of Yale University during school year 1981-1982. An earlier version was clrculated as Economic Growth Center Discussion Paper No. 412 (July 1982). I om grateful to Jonathan Eaton and John Power for their helpful _ommente and suggestion although the usual disclaimer applies. _ benefitted considerably from the intellectually stimulating envlromment provided by the _conomlc Growth Center as well am the hospitality of its staff.
and discussed, effective
and the contribution
exchange
rate movements
of monthly
effective
exchange
1964-1972.
Section
4 studies
.behavior in the
intervention
about such behavior of
1950's and 1960's. 1970 exchange
without
rather than full flexibility,
adjustments
less of a possibility.
behavior
in the Philippine
of the current monetary dollar
account
authorities,
exchange
developments are floating, effective
rate.
foreign
pre-occupation
rate changes
balance
of payments
more
and disruptive
The analysis exchange
exchange
in many
rate
the importance by the
to the peso~U.S.
because
account major
currencies
rate has resulted
are not in the direction
developments
dis-
intervention
to current
Furthermore,
by limited
undertaken
commitment
the post-
exchange
demonstrates
rate adjustments
the
of the
fundamental
of official
market
the nominal
which
reminiscent
1970
has
began with
characterized
the rate of response
with
this system
shocks which
prevented
as well as the latter's However,
findings
in early
is yet to be achieved,
abrupt
in the exchange
hypotheses
the major
rate system
upheavals
balance
making
to that in
Alternative
respects,
the external
is found to be rather weak.
exchange
the underlying
In many
has probably
from developing,
is compared
Finally,
is more precisely
equilibrium
the variability
in the light of official
exchange
the exchange
which
on
5.
a flexible
While external
rate regime,
1973-1981
exchange market.
then.
realingments
Furthermore,
and tested.
in weathering
currency
rate changes
in Section
adopted
in 1973-74
during
exchange
it in place since
the country
oÂŁi crisis
rates
are formulated
The Philippines
assisted
is assessed.
foreign
the study are summarized
and has kept
of exogeneous
suggested
instances.
in by
1.
The Philippines
The 1970 _.chanae
already
had a flexible
Rate Reform
exchange rate
systmn even before
the onset of generalized currency floatlns in early 1973.
Confronted by a
foreign exchange crisis that developed in the late 1960's, the goversment allowed the Philippine peso to float in the foreign exchange market on February
21,
1970.
It is not clear, however, whether the monetary authoritiesv longer term objective
was, in fact.to
1962,
for
example,
tater.
2
Similarly.
to
have
the
shift peso
was allowed
in the
been stabilized
to a flexible
1970
exchange
to float,
floating
by October
only
episode,
of that
rate to
the
year.
reg..
In 3anuary
be fixed
exchange
Zt seems,
six
rate
months appears
therefore,
that
the principal motivation for floating at the time of its adoption was to determine
what the
move to a flexible
new peso-dollar exchange
exchange
rate
rate
system.
should
Eventually,
be rather the
than to
exchange
rate
_uld
have been fixed, as in the 1960's, were it not for the events that subsequently characterized
the
These
international
events
may have
Philippines
is
enabled
country
the
concerned,
and mate 1960's. crisis
of the
easily
developed
the price
sharp
to
provided in the
avoid
proportion in the
to
upheavals
rate that
_ exchange
that
of the
1950's
the
rapid
considering in the
in the
blessing"
exchange
Philippines
deterioration
3 and recession
that
exchange
ei_lar 1970's,
scene.
a "disguised
sense
the
Based on the
and extended
increases,
monetary
terms
industrialized
as far
as the
flexibility occurred
rate
in the 1950's
history,
an exchange
and 1960_s _creases
of trade
probably
could in oil
following
countries.
have prices,
these It
will
not
4
be too
difficult
to
see
what
the
_ituation
would
have
been
if
the
government
were committed to a fixed _eha'_g._fete. The country's exchange
c._:perience
d_:ring_i_epost-independence period
up to 1970 is well documented in Baldwin (1975).
Essentially, what one can
observe is a cycle consisting of a period of g_o,_i_%_cernal followed
by the
and finally,
imposition
a delayed
and,
imbalances,
of various forms of tr_d_ and exchange controls, therefore,
large
deva!u_:tic_
could no longer defend the existing exchang_ rate.
when authorities
Obviously, the adjustment
process that such a devaluation required was costly and painful.
Had changes
in the exc range ra_e been undertaken more promptly, before relative price distortions could grow and become embedded in the economic system, adjustments would have b__enfar less disruptive.
But the problem was precisely the
difficulty of making timely e_change rate adjustments under system even when such changes were clearly called for.
the par value
Accordingly, the
past two devaluation eplsode_,too_:place under a "c_i_is atmosphere" (Krueger 1975, p. 50) and had b_2e_traumatic experiences, both politically and economically. Under the fi_ed exchange rate residue,__her,_ w_m a great tendency to consider the exchzage rate as an objective rather than as an instrument of policy. pride
Haintaining the existing exchange rate was a matter of national
and prestige,
changes, persisted
and changes in the
rate,
were critical political issues. under
the
to a lesser extent,
more recent
system
or even
prospects
of such
These attitudes have perhaps
of exchange
rate
flexibility,
but
Because exchange rates are "floating," the public have
increasingly considered changes in the exchange rate as a normal economic
5
phenomenon.
And because
have had less disruptive probably
become more
ment of development
changes
have been made
consequences.
confident policy;
in the 1970's despite 1973,
these
Furthermore,
gradually , adjustments policymakers
of the use of the exchange
reliance
substantial
rate as an instru-
on trade restrictions
trade
and current
have
has been less
account
deficits
after
4
These do not imply, however, rates in th_ Philippines that is indicated serious
tensions
(Haberler
1974,
adoption of flexible
and disturbances Whether
a means by which
flexibility
than the previous
system of fixed
or not
exchange
a flexible
a viable
the remainder
of tb/s paper looks into how exchange
currency
floating,
it has continued
Of exchange
The Post-1970 Exchange
to be so up to the present
trading
rate policy has been
foreign
exchange
tied to the U,S. dollar, Since
spot peso-dollar
market,
the exchange
and selling Thereafter,
exchange market. 5 exchange
rate, or
ratee of the last the
rate
has
and
rate
rate has been determined
in the foreign
rate," was based on the buying the
Accordingly,
on the period of generalized
time.
exchange
Until April 1972, the daily interbank
in
is
Rate Regime
peso has been traditionally
daily on the basis of Interbank
transaction
rate policy.
with emphasis
reform of 1970, the spot-peso-dollar
the "guiding
rate regime
1973-1981.
2.
The Philippine
since 1970
exhhanges"
exchange rate can be maintained
on the actual
in the country
conduct
All
"can cope with much more
still depends
pursued
exchange
has solved for it all p_oblems of adjustment.
is that exchange
p, 331).
able to provide
that the mere
been
established
on the
sales made
basis
of
in the preceding
at each exchange the spot buying
rate.
is
There
made
day,
average
the weights rates
rates
of
being
for other
is
available
no
Bank's
domestic
by the
current
forward
Central
exchange
rates
the value
currencies
for
are based on
to the actual
buying
exchange
Bank
for
all
of trading
in New York of these currencies
at the close of the day prior
Manila and on the Central dollars.
weighted
Exchange
and selling
of U.S. dollars)
the
(in terms
purchase
in
and selling
rates
for U.S.
market,
forward
cover
but
transactions
involving
swap
•
arrangements. While it is officially
maintained
that "all exchange
place in a free market, ''6 the Central
Bank has exercised
movements
rate through
foreign
in the peso-dollar
exchange:
in its behalf) to maintain
activities
"Generally,
in the foreign
and U.S.$23.5
Central
Bank intervention exchange
total volume
about 60 per cent° 7 Bank to manage around float.
was only 9.4
Another
the exchange
the guiding
Beginning
which
increased undertaken
the peso-dollar
Until April 1972, the margins
bank acting rate Report
its intervention
in 1972, however,
proportion
of the
by commercial
banks,
th_s had risen
to
has been used by the Central
rate is the maintenance
rate within which
or sale of
its sales and purchases
per cent; by 1972,
instrument
over
sales of only U.5.$5
substantially,
transactions
control
(Central Bank Annual
making
take
at the current
Bank limited
for a markedly
of fore_ign exchange
the purchase
exchange
respectively.
increased
accounting
In 1970, this proportion
market,
direct
(or an agent
rate"
the Central
exchange
million,
Bank
foreign
of the exchange
In 1970 and 1971,
million
of foreign
the Central
stood ready to provide
the stability
1970, p. 70).
exchange
transactions
of bands
or margins
rate is allowed
to
were 3/4 of one per cent above and
one
per
cent
allowed the
below
to
float
the within
guiding
rate
Aside
from
for
of
although
as mentioned
the
trade
1970's
involving
as
the
and
stringent.
payments
the
while
free of restrictions,
invisible
payments
However,
they can maintain
provided
the source
borrowings
require
the
been
there
still
rate
was
side
of
are still quite
currency
l_m_tations
abroad.
is eligible
on
Residents
bank deposits
are
expenses
bank balances
are not
overseas.
domestically,
for deposlt. 8
All foreign
Bank approval. rate
than full flexibility,
described
and dividends
educational
nor maintain
former
The regulations
of profits
of dependents
are
operation,
on the
decades.
account
there in
reliance
for travel abroad,
foreign
prior Central
precisely
each
rate,
are
less
It should be clear by now that the exchange
may be more
on
are quantitative
securities
rather
exchange
exchange
two
remittances
of the deposit
pines is one of limited
cent
which
preceding
such as those
foreign
over
has
abroad and maintenance
to purchase
per
and the capital
generally
allowed
4-1/2
restrictions there
to
For instance,
of students
control
exchange
compared
of
the
day.
of
above,
Subsequently,
band
trading
forms
invisible
rate.
a wider
these
a number
in
guiding
as a "crawling
peg"
system In the
PhÂŁ1ip-
so that the regime (Willlazson
1965, p. 2)
9 rather
than floating.
developing teristics presents help things.
country preclude
a selected
explain
the
llke
Thls exchange the Philippines
free floating
asa
set of indicators
country*s
choice
of
arrangement where feasible
_s not unexpected
certain
structural
alternative.
of the Philippine exchange
rate
regime,
in a
charac-
Table i
economy among
which other
can
8 Table SELECTED
I.
Grp_s
Domestic
Product
A,
GDP
(ln million
B.
Populatlon
C.
GDP Per Capita
ECONOMIC
(GDP)j
U.S.
INDICATORS
Population ....
dollars,
(in thousand
Growth Rate of Real GDP
E.
Inflation
and
persons,
Trade
A.
and
Exchange
1980) 1960-70
1970-80
4_8
5,9
5.3 5.7 5.7
13.8 17,1 13.3
(_ per year)
Market
Sources:
a_/ _/
Related
Indlcators 1975
1980
34,4
38.4
43,9
46.2
79.5
78.3
63.3
43.9
39.8 25.9 65.7
35.0 35.0 70.0
26.8 31.2 56.0
25.3 22.6 47.9
Capltal Goods _c/ Intermediete Goods _d/ Consumer Goods
18.7 62.8 18.5
18.8 74.3 6.9
19.5 72.6 7.9
16.2 79,4 4.4
Ratio Of Commerclal Bank to Central Bank Holdlngs of Foreign Exchanse Assets (Z)
48.7
51.0
52.8
60.0
Proportion
of Trade
in Goods
in GDP
Share of Tradltlonal
(_) Ex_orts
(_)_7
Share of Top Two Tradlng Partners in Total Trade
Imports a. b. c.
E.
649
1970
a. b. C. D.
48,317
(Z)
in Total Exports C.
Rate 째_,.
1965
and Services B.
^
31,337
mld-1980)
Consumer Price Index Wholesale Price Index GDP Deflator If.
Inflation
1980)_ /
(in U.S. dollars,
D.
Rate
1
(Z)
United States Japan U.S. and Japan According
to
End Use
(Z)
Central Bank of the Philippines, Statistical Bulletin; National Economic and Development Authority, Philippine Statistical Yearbook; IMP, P1nanclal Statistics.
c_/
Based on the GDP at 1980 pesos and the Coconut oil, copra, copra meal or cake, and lumber, sugar and copper concentrates, Machinery and equipment.
_/
Unprocessed
and
semi-processed
average 1980 exchange dessicated coconut,
raw materials,
and
supplies.
rate. logs
9
It
can
readily
the U.S. dollar among major rically
be
seen
currency
why
the Pb_llppines
area during
currencies.
Aside
trading
partner,
the U.S. in the latter
regard.
Japan has posed
That free floating
native for the Philippines
can be explained
economy
of an internationally
(Crockett
and Nsouli
character
of the Philippine
services because
domestic
1977; Branson
residents
in foreiEn
for domestic
foreign
to be
the Philippines _
a serious
1978).
short-run
financial
internationally,
depends
trade elasticities.
If these
in view of lags in responses would be unstable. tainty,
wh/chwould,
Changes
in
From
January
rata increased
conditions
result
1970
to
account
conditions
inflexible
in a considerable
in turn, adverselyaffect
Exchange
for dp-_nd capital for
flows,
and
concerning
do not hold in the short-run,
and relatively
This would
to be effectively
the domestic
by current
on the Marshall-Lerner
open
feasible
the supply of and demand
mainly
market
of trade in goods and
be little basis
because
of the
The relatively
contracts
and there would
would be determined
stability
No_nal
tend to want
On the other hand,
is not integrated exchange
would
alter-
openness
integrated
(the proportion
threat to
is not a feasible
by the relative
and Katseli
economy
currency,
currency.
in
floating
in GDP was 46.2 per cent in 1980) does not make floating
denominated
market
continue
the period of generalized
the U.S. has remained
although
and by the absence
to
from the fact that the peso has been histo-
tied to the U.S. dollar_
principal
opted
prices,
then floating
increase in uncer-
trade and investment
flows.
Rates
the eud
of
the
decade,
by 93.6 per cent from _3.92
the
e.g.,
peso-dollar
per U.S. dollar
exchange
to 27.59
per
I0
U.S.
dollar.
The
largest
when
the
rose
from
rate
representing
a 64.0
increase _3.92
per
cent
in the 1960's depreciated _3.90
per
O. S,
increase.
1973_ when
in March
This is a considerably those resulting
in small
rate, although
during
of
U.S,
the
exchange
1970
dollar, rate
per U.S. dollar
currency
to
change
of the Philippines
can be dlvided
over the average
covers
the
of 1975 when
from the last quarter
from
depreciation of 1975
the
and with
interest
2 shows, the differentials
the U.S.
of the exchange
in 1979.
exchange
the period
last
less
On an annual
the prevailing
rates,
of generalized The first
of 1974 when rates were
period
1973 has been
e.g. j the rate differentials
trend of nominal during
adjustments
The average
rate of crawl
into four sub-periods.
1973 tO the third quarter
1).
to
is 2.2 per cent per year.
As Table
a few exceptions,
predominant
since
1981.
as compared
Moreover,
(Figure
to observe
this period.
floating
in December
depreciation
increments
percentage
kept well
there were
Based on the
quarter
per
being 3/4 of one per cent.
U.K. in 1974 and 1977-1979,
second
in
by 20.1 per cent from _6.77
change in any year
absolute
have been generally
The
comparison,
smaller magnitude
percentage
rate differentials
floating
In
rate has risen
In this connecticut, it is significant
experience
_6.43
1973 to 28.13 per U.S. dollar
continuously
the average
the
to
the system of generalized
than one per cent, the largest
with
dollar
occurred
from the 1960 and 1970 devaluations.
absolute monthly
basis,
period
by 95.0 per cent from 22.00
the peso-dollar
per U.S. dollar
have been made
U.S,
this
dollar.
Since March was initiated,
per
during
quarter
was the dominant
slightly of
1974
trend.
to 1979, is characterized
the exchange currency
is during March appreciating. to
the
third
The third period,
by a slight appre,
Figure Nf_tII_L
PESO-IJ.S.
1
DOLLAR "_XCHAH_,EI_TE
--
_8.50
['8.00
_8.50
_
P6.00
_7. O0
-_'7. O0
__
1P6.O0 73
__/I
I
,
74,
75
_' 76
|mllll
i 77
=
IIf_7
t 78
_
-_.
__
l
--
I
--
|
t
i
79
80
81
-
]PG ,/00
I-m ,I_
Table INTEREST
RATES
2
IN THE PHILIPPINES AND SELECTED COUNTRIES: (End of Period Per Cent Per Annum Rates)
1973-1981
1973
1974
1975
1976
1977
1978
1979
1980
1981
Phlllpplnes _a/
9.74
10.03
16.90
15.42
12.00
11.52
12.70
14.85
16.91
HongKon_ -b/
8.00
6.00
3.25
1.75
9.25
4.50
9.25
13.00
14.00
Singapore _c/
n.a.
n.a.
n.a.
3.76
4.54
5.29
7.15
11.22
12.05
United
7_41
7.11
5.21
4.41
6.14
9.34
12.10
13.60
12.97
5.80
6.83
5.68
4.15
6.06
4.86
8.13
9.90
6.75
7.00
5.63
3.i5
2.65
3.96
4.06
9.58
10.27
10.82
12.42
10.99
10.64
13.51
11.56
15.84
13.02
14.78
6.00
1.50
1.12
1.12
0.13
4.42
5.75
8.75
Japa_
States _d/ /
Germany _-f/ Unlted
Kingdom _/
Switzerland _/
Sources:
_/ b_/ _/ d__]
8.31 5.50
Philippines - Philippine Financial Statlstlcs_ _onEKong - }!on_Kong _[onthly Digest of Statistles; Singapore - The Monetary Authorltv of Sin_agore StRtlstlcal Bulletin; All Others - O.E.C.D. Maln Economic Indlcators.
1973-1974: 91-day Treasury Bills' rate; Three-month time deposit rates. Three-month deposit rates. 90-day Treasuy Bills' rates.
e__] 1973-1976: 60-day Treasury Bills' f_.] Three-month loan rates. _/ 91-day Treasury Bills' rate. h/ Three-month deposit rates.
rates;
1975-1981:
61-90-da y money
1977-1981:
"Gensaki"
market
or money
rates.
market
rates.
13
ciation
and
consists
of
started
to
price as
relative
stability
the
recent
depreciate
experience
measured
period,
per
period,
rather
Considering
these
cent
exchange
from
again.
consumer
and
The most the
during
the
years
once
by the
8.1
third
is
more
of
It
1980
price
to
would
periods.
25 per I0.1
second
period,
per
ceut
during
the
the
exchange
feature
limited
extent
the magnitude
of of
nominal
when
last
to
the
of
cen¢
rates the
country's
domestic
during
per
cent
inflation,
the
first
during
the
period. Fate
changes
depreciation
of the country's
period
note
rate
was
the
notable
1981,
The annual
index,
The last
be useful
during
14.8
rate.
decribed
from
trade
1973
and current
deficits
since 1974 (Table 3), as well as the relatively
domestic
inflation
exchange
rate
above
to
1981.
account
rapid
rate of
I0
vis-a-vis
resulting
deficits
through
borrowings
can make
a larger
depreciation
In general, the necessary
from abroad
it appears
was to _nimlze external
one would have expected the
or drawing
domestic
currency
by current
by financing
down on reserves,
or by depressing
in the nominal
to see a flexible
confronted
adjustments
that the decision
the change
of
a country
are of course not mutually
Philippines,
incomes
exclusive.
by allowing
or lowering
the
prices.
In the case of the
taken by the monetary exchange
the deficits
authorities
rate principally
through
financing.
From
during
in
rate to depreciate,
These options
million
2),
the U.S. dollar.
account
exchange
(Figure
per the
The country's
1973
to
1981,
net
In
contrast,
year.
long-term
capital
inflows
the
combined
net
years
amounted
_m-u-diately
preceding
ten
external
long-term
and medium-term
averaged
long-term
debt
to
only
U.s.$g06
capital U°S.$752
outstanding
inflows million. increased
Table 3 S__
BAIANCE OF PA_NTS EE__%'fS, (In Million U.S. Dollars)
1973-1981
1973
1974
1975
1976
1977
1978
1979
1980
1981
Exports, f.o.b.
I,886
2,725
2,294
2,574
3,151
3,425
4,601
5,788
5,722
Imports, f.o.b.
I,596
3,143
3,459
3,634
3,915
4,732
6,142
7,727
7,946
290
-418
-i,165
-i,060
- 764
-1,307
-i,541
-i,939
-2,224
Sarvlces (Net)
-
-34
-
-248
-
-
-
-
Transfers (Net)
246
276
318
269
260
312
355
434
472
536
- 176
- 892
-I,050
- 752
-I,173
-i,576
-2,051
-2,293
135
172
482
i,184
878
i,062
i,250
I,077
i,739
4
- 410
134
126
- iii
- 326
- 974
- 554
Trade IBalance
- 45
259
178
390
546
541
CurrentAccount Balance Official Grants and Imng-Term Capital (Net) Basic Balance
671
-
Source: Cantral Bank of the Philippines,Armual Reports. •
Fixur_
2
N_INAL PE_)-U,S. I)OL1,AR EXCIIAHC,K RATE° CONSUHER ANn ]tHnLI:SAI._ PRT_'5 (1973:T - _nr) 400
_-
,,.
400
300
300
_ole,-,ale
Prtce
Index
/
200
.t_
2OO
___4ce
e,.
_
-'"
Tndex
P_t_-r_ol Excha_
100
_
90 73
_
.........
--
-
_
_
!
[
!
4
I
7&
75
76
77
78
la r R,_¢e
....
I00
'
I '79
I 8g}
--
I _1
90 t,n
16
by almost billion
six times from U.S.$2.0
in December
external
financing
to maintain
enabled
the Philippine
the level of the country's
Bank stood at U.S.$1.0 billion.
billion.
In terms of monthly can finance,
the Central
since 1973.
The corresponding
two years of the 1970ts
Central
was
reached
Bank obviously
allow a drastic
decided
depreciation
Based on an interview p. 4) explains
the policy
"The unexpectedly instability exerting
efforts
up the Central worsening maintain
with
account
the high reserve
senior
which
equivalent
of imports. billion
a partia
of 4.3 month's
In 1981, the current
and could not be fully
to only U.S.$1.Z
government
bill_on. rather
officials,
up foreign
account
exchange
deficit
tscared_
In
The than
level as
a safeguard
these resmrves
has not
been
time deposits
since
(1978,
as follows:
authorities market
two years apparently
against
It is also claimed
substantial,
reserves
capital
the succeeding the strategy
Bautista
in 1974 and the perceived
the monetary
balance,
exchange market.
and
have reached
Bank has maintained
from the international
in the foreign
placements
reserves
to draw down on its reserves
economy
Bank reserves.
current
amounting
of shoring
to borrow
but also
of the currency.
large current
in the world
not only
figure in the 1960's and the first
2.5 months
inflows
of
the Central
imports
an average
a peak of U.S.$2.3
by net capital
Bank
merchandise
imports
reserves
reserves of
By 1980, Central
level which has not fallen below
financed
1973 to U.S.$II.4
authorities
international
reserve
deficit
monetary
In 1973, international
cular level of reserves
account
in December
1981; and at least up to 1980, the magnitude
to raise it (Table 4).
U.S.$3.2
billion
and build
of increasin&ly adopted
speculative
was to activities
that the cost of
their yields
have been relatively
into
high
holding
from short-term
(averaging
6-7%)."
17
Table
4
INTERNATIONAL RESERVES, 1970-1981 (In Million U.S. Dollars)
Year
Official , Reserve s_ a/_
Months
of Imports Coverage
1970
251
2.8
1971
376
3.8
1972
549
5.3
1973
1,037
7.8
1974
1,503
5.7
1975
1,361
4.7
1976
It642
5.4
1977
1,525
4.7
1978
1,883
4.8
1979
2,423
4.7
1980
3,155
4.9
1981
2,574
3.7
Source:
Central
_/Including
Bank of the Philippines
gold and SDR's.
18
While relatively national
the level of international
high
in a historical
standards.
international slightly
Table
reserves
higher
sense,
in terms
the comparable
based on World
figures
months
of import
coverage
estimate
for the Philippines
The Black Market
period Of limited
period
of adjustable
considerable
speculation referring
par values,
rate
1970_ there
the currency
is expected
The median
countries
(countries
countries
were
reserve
countries
is 4.5 months_
level in
included
in the
very close
to the
large
reduced.
experience,
to go down and never
future,
"... speculation
ceases
changes
are small enough and frequent
payoffs
presented
from speculation.
in relatively
that incentives
Haberler
suggests
the earlier
devaluations
frequently
likelihood
during the more
During
substantial
have been made is a great
Pressures
less of a problem
anticipated
may have been somewhat to the Brazilian
income
flexibility?
for obtaining
rate adjustments
small doses after
On
and Speculative
become
exchange
opportunities
Since exchange
Exchange
speculation
recent
Bank classification).
of 4.7 months.
for Foreign
Has disruptive
Report
was only with
and industrialized
for all middle-income
1981 World Bank World Development
of Philippine
(countries
for middle
than that in the Philippines.
may he
so by inter-
of import coverage
for low income countries
per capita GNP of over U.S.$380)
slightly more
it is not necessarily
of months
per capita GNP of up to U.S.$380
with
in the Philippines
5 shows that in 1979_ the level
than the average
the other hand,
reserves
for
(1972, p. 3),
that even in the case where
move up in the foreseeable
to be a serious
problem
enough. ''II
if exchange
In order
rate
to ascertain
19
Table
5
INTERNATIONAL RESERVES OF SELECTED COUP"tRIES AND GROUPS OF COUNTRIES s 1979 (In months of import coverage)
A.
B,
Groups
of
Countries
i.
Low-lncome
2.
Middle-income
3.
Industrial
Selected
(Averages)
countries
4.2
countries
5.2
countries
5.0
Countries
1.
South
2.
Mexico
1.7
3째
Pakistan
2.5
4,
Indonesia
3.4
5.
Srl Lanka
4.1
6.
Singapore
4.1
7.
Brazil
4.1
8.
Thailand
4.2
9.
Bolivia
4,5
10.
Philippines
4.6
ii.
Burma
4.8
12,
Malaysla
5.6
13.
Chile
5.7
14.
Paraguay
8,8
15.
India
10.2
16,
Colo_bla
12.7
17.
Argentina
13.4
Source:
World
Korea
Bank,
1.5
Wor!d
Develo_eut
Report.
1981.
20
whether
this has indeed been the case for the Philippines,
black market
rates over official
are compared
with those in the 1970's.
market
for foreign
exchange
may at least provide activity
during
a rough
pressures
rates over official Thereafter,
in the 1950's and 1960's
Inasmuch
is a highly
as the Philippine
speculative
idea of the relative
the exchange
extentof exchange
The smallest margin
rate was double
an upward
the official
speculative rates.
to tremendous
rates was 24 per cent at the beginning exhibited
black
one, such a comparison
rate was subjected
in the 1950's.
the margins
black market
rates
the period of fixed and flexible
As Table 6 shows, speculative
or guiding
the ratios of
of black market of the decade.
trend, so that by 1959,
exchange
rate.
the
It was during
this 12
period when various
trade and exchange
With
of liberalization
the initiation
controls were measures
introduced
in 1960, the margins
reduced
to about 30 per cent in 1960 and 20 per cent in 1961.
further
contracted
following
in 1962 when exchange
years of decontrol
until
and expanded.
decontrol
the first half
were
The margins
was implemented. of 1967,
In the
the black market 13
rate for foreign However,
stayed
when the trade balance
1966 to a deficit again;
exchange
of U.S.$242
the prem/ummoved
per
before
to the official
worsened
million
from a deficit
the following
the peso was allowed
exchange
to float,
rate.
of 0.$.$25
in 1967, the black market
from 16 per cent during
43 per cent in the same quarter month
close
became
the last quarter
year.
In January
the margin
million
in
bullish
of 1968 to
1970,
one
stood at almost
60
cent. The
exchange
1970
exchange
reform
appears
to
have
rate, and for the rest of the 1970's,
5-10 per cent except
in the last quarter
relieved
the
the margins
pressure would
of 1975, when the margin
on
the
remain within hit 14 per
n
_
o
n
_
_ Q o _ _ _ _ _ o _ _ _ _
__i l-
I
_
22
cent.
The relatively
stable and lower margins
during
this more
recent
14 exchange
rate history
substantial
are worth noting.
trade and current
high rates of domestic market
over guiding
not do so suggests
account
inflation,
rates could have easily
dampened
it to
the country's
1974 and the relatively
in the margins place.
of black
That they did
and continuously
disruptive
speculation
changing totally, has
a good extent.
3.
Generalized Floating of Major Currencies and Effective Exchange Rates
So far, the discussion rate.
No account
early seventies, tances, pegging
major
has focused
only on the nominal
has yet been taken
currencies
the value of the domestic rather
It is therefore currency
than merely
is the "effective
floating
Under
exchange
rate"
the currencies
to have
a measure
to a representative
to that of the intervention (EER), which
the
such circums-
vis-a-vis
necessary
in relation
peso-dollar
of the fact that since
have been floating.
to any one of them implies
of other trading partners.
a measure
since
taken
that the system of gradual
rates, while not eliminating
currencies
deficits
a rapid climb
exchange
exchange
Considering
of
set of
currency. is defined
Such as a 15
weighted
average
of the exchange
An EER index measures
rates
the proportional
a-vis the currencies
of the country's
selected
(Rhomberg
base period
depending
on, among sther%the
included,
the weighing
1976).
of the Philippines' change trading
scheme employed
partners.
in the Philippine
peso vis-
partners
to a
Different
base period
trading
relative
EER indices
selected,
can be computed,
the partner
and the type of averaging
countries formula
23
used.
The factors
of greatest
consequence
are,
however,
which
partner
countries to include in the index and what weighing scheme to use.
The
former is dictated by the geographical pattern of trade, while the appropriate choice of weights depends on the particular objectives of analysis or policy (Branson and Katseli 1978, 1980).
If r_ denotes units of domestic
currency per unit of the currency of trading partner i, and wi represents the weight for trading partner i, then the effective exchange rate index E is given by
E= _
'
(1)
i wiri
where _w.
a dot over
- 1, and i = 1,...,n Let
Philippine unit
a variable
r
O
ffi uuits
case,
exchange
rate
trading
r i is
per
e.g.,
U.$.
dollar),
yen per
U.S.
obtained
a proportional
change
in that
variable,
of numeraire
currency
partners.
of home currency
pesos
of numeraire,
indicates
from the
per unit
and r i ffi units dollar, ratio
DH per U.S. of r o to
ri
of currency dollar,
(in i per
etc.
; hence
"*
(2)
Substituting (2) in (1) and recalling that Z wi - I yields 1
'* Effi_ - r w.r.. o
i
I_
the
(3)
The
24
It
can be readily
seen
from
(3)
that
even
if
the
peso-dollar
rate
ro
were to remain fixed, the effective exchange rate could change whenever the dollar's relationship with the currency of a third country changes. More important, these changes may not reflect the balance of payments adjustment needs of the country and may undermine rather than enhance the pursuit
of
domestic
policy
objectives.
For example,
the
country
may find
its effective exchange rate appreciating when the current account is weakening
and vice
In principle, effective
it
exchanse
currency.
versa.
In terns
would be possible
rate of
to maintain
by making compensatory (3),
0
this
means
a "desired"
adjustments
setting
or target
in the
intervention
E = O, giving
- xw.r.. . i 1
(4)
1
This is a policy that adjusts the intervention rate to hold the nominal effective exchange rate constant.
The policy can alternatively be to stabilize
a given real rather than nominal exchange rate.
In this case, the real
effective exchange rate index E is defined by
i
where
Po ffi home-country
price
or cost
index;
and Pi = price
or cost
index
in country i.
Substituting (2) into (5), adding and subtracting the cost
or price
in the
index
_rwi = 1, the [
expression
nmaeraire for
country,
Pn'
and recalling
once again
that
E becomes
+
-
-
.
(6)
25
The policy requires
As
that
(4)
and
weights
wi
similarly
of
so that
imply,
pegging
equivalent
defined
by
The Philippine ments
in
the
rations. the such stock the
as
those
peso-dollar
as
in
and real effective
Thus,
the
peso_dollar
it
of
Quarterly
rates
trade
would
be
or
to the
(IMP)
according
to
imply
rates, as well as what
rate
made
above does
adjust-
considenot
of
report indicators,
account
positions,
to
determine
in
terms
factors
rate r 0 and effective
have
a set
current
interesting rate
of
1982).
of
Fund
by a set
exchange
known
basis
Monetary
exchange
rate of crawl of the intervention
Calculation
not
rate
defined
and Katseli,
on the
inflation,
etc.
currencies
are
rate
exchange
an effective
(Branson
intervention
exchange
of
authorities
of
effective
constant
weights
rates
reserves,
adjustments
holding
International
changing
real
a basket
exchange
the
differential
of
to
to
monetary
Moreover,
country
a target
E _ o,
(7) is
stabilizing
what
of
nominal
can explain
exchange
the
rate E,
EER Indices
nora/hal
and
real
EER indices
for
the
period
1973
to
1981
are
16 computed
using bilateral
on the average
annual
trade
during
is designated
as weights.
The latter are based
trade shares of industrialized
least a one per cent share countries
shares
1974- 1976
in total
Philippine
(Table 7).
as the base period
because
trade
The f_rst
countries
with all industrialized
quarter
the exchange
who have at
of 1973
(1973:1)
rate prevailing
at
2_
Table AVERAGE
7
BILATERAL TRADE (1974-1976)
Export Weights
WEIGHTS_ /
Iaport Welghts
Total Trade Weights k
United
States
Japan
34.6
38.2
37.8
41.0
39.6
Netherlauds
8.6
1.9
5.0
Germany
3.8
5.6
4.8
3.4
5.6
4.5
Australla
1.7
6.0
3.9
France
1.6
2.9
2.3
Canada
1.0
2.4
1.7
I00.0
100.0
I00.0
United
Kingdom
TOTAL
a/
42.1
Computed
from
trade
data
published
in
IMF_ Direction
of
Trade.
27
that
ti_e
may be what
could
be
considered
as
sets of real EER indices are calculated, price index (CP_) and another The data for exchange International derived
of
From
by
roughly
cent.
j but
trade
appreciation
is
in 1974:1V
stability a similar
EER in
index
(WPI).
in IMF's
weights
in 1981:rV
to all three 1973_L
to 1978:111,
1981:_V) quarterly quarters
less
are
real in
1978
trends
of
lay
below
the WPl-based
both
the
CPI-
both
show
during
1973:1
ÂŁn 1978_V
The to 1974-III_
te 1979:1V
real EEE follows
(1974:IV to 1978:111) the
whole the
CPT-based
CPI-based
depreciation
although
The WP1-based
the
race
to the base perlod. 18
appreciation
when the
affecti_e
by appreciation
Over
EER's
excb_nze
the
clear_
in the second
In 1981:_V,
below the base quarter
real
period
base
from
quarter
real
and
1973:T
level,
EER exceeded
EEE was
13,4
real EER was 23,3 per
per
cent
cent
level.
extent have nominal
the peso-dollar
The
relative
sub-periods.
below the 1973:1 rate_ while
To what
clear.
in 1980:7 to 1981:IV. trend except
effective
2 shows_
EER are
real EEE is characterized
for
price
the bilateral
weighted
As Figure
real
Co 1981:TV,
the
per
the
EER and WPI-based
(1980:I
except
26.8
1981:IV,
treud
depreciation relative
Two
of Trade,
the
an effective
last
to
conttnueus
CPl-baeed
17
one based on the consumer
are those reported
Fin_antis! Stat_st_ics, while
1973:I
real
level.
EER Movements
depreciated was not
namely:
on the wholesale
and prices
from IMY's Direction
Analysis
based
rates
based
a "desirable"
inte_venClon
EER changes
been due tO adjua_ents
rate to, and to what extent
in
have they been
and
Figure NOMINAL
AND EFFECTIVE
3 EXCHANGE
RATES
130
130
120,
Nominal
EER
120
••
CPl-based
Real
i00,
EER i00
90 NPI-based
Real EER
8O
;
-, 73
J 74
L
Z
)
!
75
76
77
78
I
P
79
80
I 81
70
29
due
to
exogenous
currency
the currencies
of the Philippines'
in the intervention involved.
Over
per
cent
Excluding
the period
comparable movements rate.
that on average, than
those
first
year
of
ratio
is
have
0.64,
been
The relative
exchange
rate
of
and thus, risks
involved
mentioned
can
on EER'8
issue.
have exhibited bility
relative
of monthly
during
exchange
variability
during
employed
is the standard
deviation
the mean
during each period. exchange
floating,
however,
exogenous in
to
the
currency
the
intervention
and policy-determined
has
flows
the
caused
whether
1964-1972.
but
uncertainty
The measure
nominal
(ro) is also presented
an
rates
the variability
is compared of
exchange
of comparison,
involving
rate flexl-
rates,
1973-1981
The
as
remains
exchange
of exchange
rates during
1979).
to transactions
exchanEe
is
uncertainty
market,
effective
the period
concern
(Bautista
forward
of increased
of monthly
ratio
have been
authorities.
that
For purposes rate
quarterly
3.
period of fixed
effective
of the intervention
Figure
magnitudes
monetary
is only available
to determine
to the earlier
the corresponding
in
by recourse
more variability
nominal
exogenous
in
to the change
rates which may increase
the question
In order
of
flexibility
c_ver
change
changes
adjustments
trade and investment
reduced
hence,
the
on average,
than
seen
of exchange
forward
swap arrengeaents; important
rate
affect be
earlier,
that
be
net
the average
currency
influence also
the
partners
currency
by
generalized
exchange
adversely
undertaken
smaller
that of the variability
trading
exogenous
indicating
can
of
an idea of the relative
relatively
changes
One aspect
major
ratio
1973:1 to 1981:IV,
EEeater the
The
currency provides
is 1.42, iHplying 42
realignments?
to
variability rates
about
the _arlability in Table 8 below.
30
Nominal
effective
the period reduced
rates do not appear
of generalized
currency
when the first two years
Intervention very much variable
rates exhibited
reduced
more varlable
a slm_lar
_change
than the latter
exchange
rates
them shelly
but slightly
observations
which
•leas
bring
,.. _ainta_n
overvalued
suffer high variances
OF INTERVENTION
EXCHANGE RATES
AND EFFECTIVE
....
;19_3_1_8i _. .... i]975_1981 --
Exchange
Intervention
4.
Section national able to f!oating
Rates
Rates
.
.=
0fficial
capital market
16,7
12.0
10,7
17.6
5,2
3,3
Exchan&eHarketInterVenc_on•Be_aV_r
indicated
integratlon,
a stable market
as a feasible
- v,,
......
2 of this paper
provide
in their
8
•_64_1972
Effective
to
35-36_,
Table VARIABILITY
being
rates were clearly
that "ccuntrles
rates ..." _p.
their variability
These
fact
are excluded,
_n the recent period_
in 1954-19•72,
rates and then devalue
effective
pattern,
during
is in
The/r variability
Intervention
mind Blackls• (i_76) conclusion exchange
floating,
of the float_'ng period
_n 1973-1981.
than effective
to h_ve Become more variable
that because
the Phil_ppine
in foreign
alternative,
Under
exchange_
of the lack of interfinancial
system Is•not
thus. precludinafree
such circumstancesp
t_e
Central
31
Bank must
"make the market"
reaching
direct and indirect
authorities
over the foreign
Since changes influenced
by official
estimated
here, as well as
adopted
1973-1981,
simultaneity.
Inasmuch
the inadequate
quarterly
effort
taken in this paper should be considered
the specification Furthermore, necessarily
a complete
balance
of an exchange market
the estimated hold beyond
reaction
the sample
data.
of
of the approach of
exchange
framework,
the
as only one step towards
or balance
functions
this
The results
official
of payments
the
will be
of the problem
one would model
behavior within
Along
functions
character
treatment
market
one way
rate is to examine
or reaction
by the partial
as ideally,
to be greatly
in the exchange market.
using
monetary
in this context.
exchange market,
exchange
intervention
should be qualified
by the Philippine
can be viewed
in the foreign
authorities
exchange market
1978, p. I0); the far
rate can be expected
in the peso-dollar
for the period
the analysis
exercised
exchange market
actions
of the monetary
line, official
controls
in the exchange
of analyzin 8 movements behavior
(Branson and Katseli
of payments model.
should not be expected
period or at all times
during
to
this
period. The Central
Bank has no explicit
exchange
that of "maintaining
the stability
hypotheses
how the rate of crawl
Various
regarding
suggestions
1970; IMF Committee starting
concerning of Twenty
point foe formulating
of exchange
possible
rates";
1976; Kenen about
policy
hence,
is determined
intervention
1974; Black hypotheses
intervention
except
alternative
are tested.
rules
(e.g., Cooper
1980) served as the
the monetary
authorities'
32
behavior
in the foreign
to be tested
exchange market.
are that exchange
The alternative
rates are adjusted
hypotheses
by the Central
Bank on
the basis of: I. to
Equation
stabilize
the
II.
effective
exchange
implies
rate the
Ill. depending
adjustments domestic
economy
A reserve
(PPP)
are
made and
indicator,
to
which
A balance
alterations
to current
Foreign the change
of payments account
exchange market
in the exchange
of intervention intervention
rule,
of
major
calls
for
Bank acts
indicator,
trading
which
rules I to IV as explanatory the general
differentials
rate changes
reserves.
links exchange
rate
developments.
functions
rate as the dependent
which
partners.
for exchange
balance
intervention
to
inflation
in international
or basic
rules for example,
according
compensate
those
on the stock of or changes
IV.
that the Central
rate.
A Purchasing-Power-Parity
exchange between
(4) above, which
will be estimated
variable
variables.
using
and indicators For the jth
form of the regression
equation
is given by
E* = ajo + a. jl I. jl + ... + a.N!jN J
where E* = change jth and
intervention
in the exchange rule;
ajo , ajl,...,ajN
u = error or disturbance
target change
rate;
in the exchange
term.
Ijl,...,IjN are
parameters
+ u
(8)
= indicators to
E* can be interpreted
rate which
is realized
be
for the
estimated;
as the official
in every
period;
and
33
the l's, as determinants
of the target
1979).
In actual tests,
E* is expressed
Zndices
of intervention
used as the dependent
and effective
variable,
as explanatory
variablesD
The regression equations
results
equation.in
i.e., the coefficient
of indicators
rule
are included
appropriate. in Table
set are reported
errors
9.
Only the "best"
in the table
The criteria
of the standard
of multiple
(_2), the standard
(1973:1 = I00).
rates are alternatively
Lagged values
focus in the analysis.
each set consist
(Helliwell
in the case of intervention
are summarized
in each hypothesized
have a clearer
freedom
where
rate change
in index form
exchange
except
I where only the former is used.
exchange
in order
for the best estimated
tests for goodness
determination
adjusted
(or t-statistics)
to
of fit,
for degrees
of
of the estimated 19
coefficients,
and the Durbin-Watson
other tests are mentioned I.
No support
authorities
is provided
different
that the U.S. dollar
wi's
are the estimated
w
coefficients).
yen as the numeraire,
of 60.0 per cent was obtained. has been closely
dollar,
u.s.
The results
of the findings
of follows:
that the monetary exchange
rate.
all the estimated
Nevertheless,
has the highest
(derived from the relationship
currency
the effective
from zero.
cent
the Japanese
An overview
to the hypothesis
of the Australian
are not significantly to note
in the text.
act so as to stabilize
for the coefficient
(D.W.) statistic.
Except coefficients
it is interesting
implicit weight
of 36.0 per
= I - _ w. where i, i
the weights
In an alternative
an implicit
weight
This is not surprising,
tied to the U.$. dollar.
regression
using
for the U.S. dollar since
the
Philippine
Table SI_4ARY I.
Effective
LNER
-
Exchange
_2
=
NOTE:
II.
0.060LK (i.000)
34
OF REGRESSIONS _/
Rate Rule
2.76 - 0.03712 (3.70) (0.625) +
9
+
0.998
-
0.081LG (0.504)
0.177LA (2.199)
d.w.
+
=
+
0.078LF (i.007)
+
0.063LN (0.351)
0.148LC (1.052)
1.71
0
_
0.86
LNER - log of nominal exchange rate index; LJ, LO, IF, LN, LK, LA, LC = log of exchange rate indices of currencies of Jaoan, Germany, 7ra_Lce, NeLh_r_gnds , United Kingdom, Australia _nd Canada (in terms of U._. dollars), respectively.
PPP Rule
A.
LNER
=
4.66
+
(177.4)
_2
B.
=
LEER
_2
NOTE:
(1.255)
0.996
-
4.69 (91.0)
ffi0.990
0.107LPF
d.v_
+
=
1.20
_
=
0._I
=
1.82
0
=
_.93
0.134LPF (0.931)
d.w.
LMER = as defined in [ above; LEER = log of effective exchange rate index; LPF _ log of the ratio of PhIlipPlne: CPI to weighted average of foreign CPI.
Table 9
(cont'd,) 35
III,
Reserve A.
Indicators
Stock of Reserves i,
I_ER =
_2 2.
EER
_2
B.
(SRES)
104.7 + O.002SRES (31,2) (1.310)
=
0째922 =
=
0.812
d._.
(CRES)
I.
-
=
108.3
(51.3) _2
2.
EER
=
_
0.87
1.71
_
=
0.89
=
1.21
0
=
0.90
51,3
_
1.88
0
"
0.92
0
_
0.89
p
=
0.89
=
0.002CRES
(1.393)
0.919
=
0
102.0 + 0.O07SREE (18.5) (2.338)
Chang e in Reserves NER
O,96
d,_,, =
d._,.
-
O.O03CRES
(25.2) (o.844) _2
C.
=
0.758
Stock of Reserves
I. _
2.
EER
_2
NOTE:
and Chan_e
i_ Reserves
= _05.8 - o.o02_Es - 0.002c_s (30.7)
_2
d._.
=
0.935
=
=
(0,847) d._:.
(1.278) =
102.8 + 0,006SREF (18.0) (2,074) 0.803
d.w.
N ER- nominal exchange exchange rate index.
=
1,20
-
0,002CRES (0.674)
1.80
rate index;
_ER = effective
Table 9 (cont'd.) 36
IV.
Current A.
Account
Current 1.
2.
Account
NER
_2
_
=
EER
TM
Indicators
(CAB)
104.4 - 0.O05CA_ (64.1) (2.724) d.w.
-
_
1.46
110.9 0.002CAD (19.9) (O.710) 0.788
d._,.
O.005CAB(-I) (3.058)
-
=
O
-
_
O.O02CAB(-I) (0.823)
1.75
0.83
-
p
O.O05CAB(-2) (2.837)
O.O08CAB(-2) (2.586)
ffi0.93
Basic Balance(BB)
i.
NER
_2
2.
EER
_2
NOTE:
a/
Balance
Balance
0.948
._2 =
B.
and Basic
=
=
108.3 (57.6) 0.922
=
=
-
O.O03BB (1.510) d.w.
-
=
iL3.6 + O.O01BB (22.5) (0.537) 0.777
d.w.
-
1.17
-
=
O.O02BB(-I) (1.128) 6
0.O03BB(-2) (1.530) =
0.87
=
0.94
O.O04BB(-I) (1.622) 1.80
#
NER = nominal exchange rate imlex; EEK_effectlve exchange ta_e_ndea;-_CAB_-l) = CAB lagged one quarter; CAB(-2) = CAB lagged two 0uarters; same with BB.
Absolute values of t-statistic_ are in parentheses; by Cochrane-Orcutt iterative techniflue.
estimation
37
2.
The results, likewlse, reject
authorities
follow
a PPP-rule.
the hypothesis
The coefficient
is not close to unity and not significantly the constant effective
exchange
regression variable
is highly
significant.
rates.
equations
were also estimated,
3.
determinant
using
to be a significant
rates.
However,
lagged values
contrary
equation
significantly
of CPI, and
better results.
different
(CRES) instead
for nominal
variables
The results
average,
of SRES,
and effective
adjusts
nominal
(CAB) developments.
of two quarters, on current
implying
account
exchange case,
of SRES in the
is also positive using
it
the change
significant
and not in
both SRES and coefficients
both
rates.
the hypothesis rates
during
that the Central
in accordance
that adjustment
developments
(I) only
Regressions
The relationship
All of the coefficients
involving:
rates
did not yield
exchange
although
in the latter
as well as those using
exchange
support
rate adjustments,
of SRES is positive
from zero.
(SEES) is an
in the case of effective
exchange
and
of the explanatory
The coefficient
for nominal
CRES as explanatory
4.
determinant
to __considerations.
regression
reserves
exchange
the coefficient
CPI term
from zero, while
WP_ instead
but these did not yield
of nominal
appears
past.
different
The data do not show that the stock of reserves
important
balance
of the relative
This is true for both nominal
Regressions
incorporating
that the monetary
with current
is significant
the current
period
account
up to a lag
of the intervention
are also of the expected
the contemporaneous
Bank, on
rate depends
and in the recent
signs.
In regressions
CAB; and (2) the contemporaneous
38
CAB and CAB lagged variables
Regressions effective
exchange
confirm
financial
the basic
much
that.monetary
better
account
than those
with
rather
peso-dollar
the rate of response Moreover_ exchange
in the direction
rate
for nominal
in a
exchange
exchange
rates,
in the intervention
exchange
pressure
rates
implying rate
on the
rate considerations. intervention
The
rule I is
rates,
changes
reaction
manifested
by current
in terms
account
during
is focused
coefficients
on nominal
is
rather
in the latter have not always
by the needed
is associated
Bank's
rates can be specified
by the estimated
attention
instances
the Central
as well as fairly recent periods.
implied
because
suggested
show that in many account
equations
exchange
in the contemporaneous
current
the paramount
1973-1981,
developments
will
reBarding
the hypothesized
to exchange market
than effective
2 above
the exchange
These
this observation.
for nominal
rather weak.
the
poorly.
for effective
of responses
However_
are not significant.
performed
in determining
than effective
Thus, for the whole period function
hand_
variable
make adjustments
of the tests involving
consistent
On the other
as well as those using
in Section
the regression
authorities
basis of nominal
from zero.
such as the one in the Philippines.
On the whole,
performed
balance,
rate as the dependent
of the current
of the explanatory
a lag of two quarters
the point made
setting
5.
different
of CAB beyond
involving
importance
outcome
all the coefficients
are not significantly
the coefficients
results
one quarter,
adjustment. 1973-1981,
with an appreciation
been
A look at Figure a weakening
of the
of the effective
4
Million U째S. Dollars
39
40
exchange
rate
ments,
it
and
would
exchange
be
versa. for
inflation
relative
in determining
in view
to its trading
eroded.
of changes
paper
has
of
currency
floating.
The nature
and various as other
changes
in
official
the
The exchange
than
rate regime
is characterized
domestic
and direction
currency
floating vis-a-vis
the
external
towards
trade
rate may be
advisable,
competitive
the monetary
evaluate,
of
in
in
exchange
at
in
position
authorities
a rather
during
the
the
post-1970
is
should be
rates,
of
flexibility rates
rate the
foreign
rather
approprlate/y
U,S, dollar.
period
of
were were
limited of
exchange the
sense,
regime
country's
in
exchange
market.
during
the
own
light
of
the post-1970
than full flexlbili_y,
In certain
was
Furthermore,
examined
described
the
generalized
rate
discussed.
in the Philippines
by limited
can be more
if the trend
of
exchange
exchange
behavior
effective
policy aimed
exchange
peso-dollar
use
an exchange
Philippines
countries'
to
Conclusions
implications
intervention
period
the
develop-
rates of Philippine
international
to
experience
well
the extent
in real effective
attempted
exchange
as
authorities
of the country's
At the minimum,
5.
analyzed,
perverse
partners,
that the country's
co_istantly vigilant
This
such
of the more rapid
a given real effective
order to ensure not grossly
avoid
monetary
diversification
Finally,
stabilizing
the
to
This need will become more pronounced
geographical
continues.
In order
necessary
rate formulations
intervention. greater
vice
and the
as "crawling" respects,
rather
this system
41
has assisted
the country
the oil crisis
in 1973-1974
the 1950's and 1960's. system of limited fundamental exchange
in weathering without
While
exchange
disequilibrium
rate adjustments
less of a possibility,
order
to
The results
of
the
in
the
rities,
as
well
exchange traditional rates, currency rities the of very
rate
to
country
the is
consider
extent
and
maintaining least,
effective
immune
Thus,
it
effective
direction
the
exchange
monetary
in
disturbances be rate
imbalances.
of
in the
monetary
explained of
autho-
by the
by exogenous
formulations
in
determining
Furthermore,
from
to
be vigilant
be
peso's exchange
monetary
would
current
floating
generated
it
the
peso-dollar
a world
for
in exchange
the
competitiveness, authorities
the
nominal
important
it would
external
importance
be
more
behavior
by
the
the
authoboth
viewpoint
advisable,
of
at
changes
in
the
real
rates.
This study has probably on Philippine
the
perhaps
intervention.
international for
would
exchange of
to
however,
from
to
undertaken
can
dollar;
the
in
and disruptive
intervention
co_itment
U.S. not
official
demonstrate
observation
prevented
In the future,
adjustments
adjustments
letter's
realignments. to
market
The second link
the
the
of
that occurred
to retain flexibility
continuing
analysis
exchange
rate.
ensure
exchange
as
authorities
began with
is yet to be achieved,
makingabrupt
in
account
balance
from developing,
rate
foreign
external
upheavals
has probably
for the monetary
Philippine
the exchange
shocks which
rate flexibility
be important policy,
the external
exchange
only scratched
rate policy
the surface,
is concerned.
be the formulation
and estimation
of an exchange
model within which
it may be possible
as far as research
A logical
extension
rate or balance
would
of payments
to look into the interactions
_maong
42
monetary, external
fiscal and exchange disturbances,
on domestic
inflation
rate policies
such as those
and to study
generated
and trade flows.
the effects
by exogenous
currency
of changes,
43
Footnotes
an
I. See Diaz-Alejandro elaboration on the various
2. devalued.
130.4
3. in
It
was
not
until
The terms of 1974 to 78.1
(1974), Helleiner issues involved.
November
trade index in 1980.
1965,
(1973
(1974), and Cline
however,
-
100)
when
declined
the
peso
(1976) for
was
continuously
formally
from
4. For instance, no severe restrictions reminiscent of the 1950's and 1960!s were instituted in the 1970's. And in 1980, the government initiated a tariff reduction program accompanied by the liberalization of the importation of previously banned categories of imports (Central Bank of the Philippines Annual Report, 1981; p. 53). While the availability of external financing certainly contributed to these developments, the regime of flexible exchange rates must be considered a complimentary element. As Baldwin (1975; p. 74) observes: "...foreign borrowings can initiate periods of prosperity but unless ... accompanied by exchange rate policies designed to maintain a vigorous export sector, these periods of economic activity are doomed to end suddenly as balance of payments problems eventually build up to a crisis." 5. _ See Central Bank of the Philippines Annual Reports for 1970, 1971 and 1972 for a more detailed explanation. In particular, see Central Bank Circular No. 289 dated February 21, 1970 and Central Bank Circular No. 340 dated April 7, 1972. 6. Central Bank of the Philippines, "Trade and Payments Philippines," June 30, 1980 (mimeographed), p. I.
System of the
7. See Central Bank of the Philippines Annual Reports, 1971-1980. The format of reporting is not similar for all years, e.g., in some years, the volume of commercial bank trading in foreign exchange is reported, while in other yearsj it is not. The trend is clear, however. 8. Foreign exchange receipts from Philippine exports and a number of invisible transactions, e.s., foreign exchange earnings of resident owners or operators of ocean-going vessels, U.S. dollar pension received by Philippine residents, and foreign exchange acquisition of resident insurance companies, are required to be surrendered to the Central Bank or its agent banks, and thus, not eligible for deposit. See Central Bank of the Philippines Circular No. 343 dated April 24, 1972.
44
9. Williamson (1965; p. 2) defines the "crawling peg" as a "system under which such par changes as occur are implemented slowly, in such a large number of small steps as to make the process of exchange rate adjustment continuous for all practical purposes: a system, therefore, under which the peg crawls from one level to another." I0. The average increase in the Philippine CP! durin 8 1973-1981 was 14.2 per cent per year, as compared to a trade weighted average increase of 9.5 per cent per year in the CPI's of the U.S., Japan. Canada, France, Oe1_any, Australia, the U.K. and Netherlands during the same period. ii.
See DonEes
(1972) for a discussion
12.
For a more detailed
account
of the brazilian
of the control
system,
experience. see Baldwin
(1975). 13. The decontrol program was primarily directed at dismantling the very stringent and complicated controls introduced in the late 1950's. Baldwin (1975; p. 58) notes: "...exchange controls were removed, but liberalization in the sense of a significant easing of all controls over imports did not occur." Furthermore, restrictions remained on domestic citizens' dealings in foreign exchange and foreign securities. These explain the existence of differentials even during the decontrol period. 14. The standard deviation about the mean during 1964-1972 1979.
of monthly black market exchange rates is 18.5, as compared to 6.1 during 1973-
15. This definition differs from Chat adopted in the NBER set of studies (Krueger, 1975) on the effects of liberalizatlon in a number of LDC's. The "effective exchange rate" in the NBER studies is defined as the number of domestic currency units actually paid or received per unit of foreign currency, and is computed by adjusting the official parity (for a specific transaction or sector) for surcharges , tariffs, implicit interests foregone or guarantee deposits, and other charges on imports and subsidies on exports. 16. These are the appropriate weights to use in the _,-Ii country case when the objective of policy is the stabilization of the domestic relative price of tradable goods (Black, 1976; Branson and Katseli, 1978). Other objectives which have been suggested are the minimization of fluctuations in the terms of trade and the current account (Branson and Katseli, 1980), the stabilization of the variance of the real effective exchange rate (Lipschitz and Sundararajan, 1980), and the stabilization of domestic real income (Turnovsky, 1980). Black suggests that the stabilization of the domestic relative price of tradable goods may be the appropriate objective for a small open LDC economy: "... less developed countries typically have little influence over their terms of tzade_ so that the main channel through which exchange rates affect the economy is the ratio of traded goods prices to non-traded goods prices" (p. 37).
45
The Philippines accounts for a major portion of world trade in coconut oil. However, a large share in trade in specific commodities does not necessarily imply export market power in view of substitution possibilities, among other things. In the case of coconut oil, the presence of closely competing substitutes, such as palm, soybean and cottonseed oils, and synthetic products, has prevented the Philippines from exercising any significant market power. Thus, the small country assumption holds for the Philippines. 17. This is not meant to say, however, that'the exchange rate prevailing in 1973:1 is necessarily the "equilibrium exchange rate." Krueger (1975) points out that while an equilibrium exchange rate can be precisely defined in theory, it is elusive in empirical work; hence, she defines the equilibrium rate as one not requiring quantitative restrictions or foreign borrowings to bolster or prevent reserve depletion. This is not "conceptually satisfactory.., however, it suffices for empirical analyiis inmost instances" (pp. 62-63). Following this definition, a period characterized by a surplus in the balance of payments may be more suitable as a base than one registering zero balance or deficits in view of the existence of various exchange and trade restrictions. The implied assumption is that if these restrictions were removed, the external accounts would tend to balance, and reserves would remain unchanged at the same exchange rate. During 1973:1, a BOP surplus of U.S.$191 million wag posted; foreign borrowings were "relatively modest (U.S.$17 million). Except for 1973:11, BOP performance in the , following q, arterly periods were not as strong as that in 1973:1; foreign borrowings also increased substantially after 1973:11. 18. The wholesale price index is usually employed in e_pirical work involving the real exchange rate because it includes the prices of a great number of internationally traded goods. Following this reasoning, the ratio of foreign to domestic wholesale prices can be considered as a proxy for the relative price of traded goods. An alternative is to use a proxy for the relative price of traded to non-traded goods, using a weighted average of import and export prices for the former and the net value added deflator or an index of domestically produced-goods' prices for the latter. 19. In most instances, the final choice significance of the est_m, ted coefficients.
depended
on the level of
46 References
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Bautista,
R.M. "The Balance of Payments Adjustment Process in the Philippines." Paper presented at the UNCTAD/UNDP Round Expert Group Meeting on the Balance of Payments Adjustment in Developing Countries, 1978. • "Exchange Rate Flexibility and the Less Developed Countries: A Survey of Empirical Research and Policy Issues." Economic Analysis and Projections Department, The World Bank, 1979.
Black,
S.W. Exchange Rate Policies for Less Developed Countries in a World of Floatin 8 Rates. Princeton Essays in International Finance No. I19, 1976.
Branson,
W.H. and J.B. de Macedo. "The Optimal WeiBhing of Indicators Eor a Crawling Peg." National Bureau of Economic Research Working Paper No. 537, 1980.
Branson,
W.H. and L.T. Katseli, "Exchange Rate Pollcy for Developing Countries," Yale University Economic Growth Center Discussion Paper No. 300, 1978."
.
"Income Stability, the Terms of Trade and Choice of Exchange Regime." Journal of Development Economics 7(1980): 49-69
Rate
• "Currency Baskets and Real Effective Exchange Rates" in M. Gersovitz et,al. (eds.), The Theory and Experience of Economic Development: Essays in Honor of Sir W. Arthur Lewis. George Allen and Unwin, 1982. Cline, W.R. International Monetary Reform and the Developing Washington D.C.: Brookings Institution, 1976. Cooper,
Countries.
R.N. "gilding Parities: A Proposal for Presmnptive Rules," Helm (ed.). Appr0aches to Greater Flexibility of Exchange Princeton: Princeton University Press, 1970.
Crockett,
A.D. and S.M. Nsouli. Countries."
Journal
"Exchange
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of Develo_ent
Studies
in G.N. Rates.
for Developing
13(1977):
125-143.
Diaz-Alejandro, C°F. Less Developed Countries and the Post-1971 _nternational Financial System. Princeton Essays in International F_nance No. 108, 1975. Donges,
J.B. Brazil's Trotting_Peg: ANew _proachtoGreater Exchange Rate Flexibility in LDC's. Washington: American Enterprise Institute, 1971.
47
Raberler,
G.
Foreword
to
J.B.
Donges.
Brazil's
Trotting
Peg:
A New Approach
toG eater Excha eRateFlexlbiiiinLDC's.Wa, nzton: Aerican Enterprise
Institute,
1971.
. "Round Table on Exchange Rate Policy," in R.E. Baldwin and J.D. Richardson (eds.). International Trade and Finance. Boston: Littler Brown and Company, 1974. Helleiner, G.K. "The Less Developed Countries and the Tnternatlonal Monetary System." Journal of Development Studies ID(1974): 347-373. Helliwell, J.F. "Policy Modeling of Foreign Policy Modeling 3(1979) :425-444. International Monetary the Committee Isard,
Exchange
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Fund. International Monetary Reform: of Twenty. Washington, 1974.
Journal
of
Documents
of
P. Ex,.c, hsn_e Rate Determination" A Survey of PoPula! Views_ and Recent Models. Princeton Studies in International Finance No. 42, 1978.
Johnson,
H. "The Case for Flexible Exchange Rates," in G,N. Ralm (ed.) Approaches to Greater Flexfbilit_ of Exchange Rates .. "Princeton: Pr--inceto_nUniversity Press, 1970.
Katseli,
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