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Monetary policy and exchange market pressure: can monetary policy stabilize the exchange rate?
A decline in domestic credit in the Philippines can increase exchange market pressure
Authors:
C. C Bautista; M. S Gochoco-Bautista
Publisher:
College of Business Administration, University of the Philippines, 2002
This paper examines whether contractionary monetary policy reduced or increased exchange market pressure (EMP) in the Philippines in the 1990s. It addresses two questions: (i) how can the stance of monetary policy be modeled appropriately? (ii) how does EMP affect monetary policy?
The study uses the Vector Auto Regression (VAR) methodology, with monthly data for the Philippines from the period 1990 (first quarter) to 2000 (fourth quarter) to test the relationship between monetary policy and EMP.
The study finds that in general:
- A decline in domestic credit growth and higher interest rates tend to raise EMP which implies that interest policy cannot be relied upon to reduce EMP or stabilize the exchange rate.
- There are notable differences in the results for pre-crisis and post-crisis periods. During crisis, interest rate changes do not significantly affect the EMP.
- During crisis periods, EMP does not significantly affect changes in domestic credit.
- Further study of the relative importance of factors such as credit and interest rates is recommended to enable authorities to pursue effective monetary policies.
