Browsing by Author "de Leon, Catalina V."

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    Credit restraint and the demand for money in the Philippines, 1967-1981
    (1985) de Leon, Catalina V.; Montes, Manuel F.
    An increasing amount of research has been devoted to the estimation of money demand functions not only for the purpose of resolving contradictory views or finding new evidence on the extent of the influence of certain key variables but moreso, because of the growing emphasis on the role of monetary policy in influencing economic activity. Financial programs worked out by the IMF with member-countries like the Philippines, which are experiencing external and internal instabilities, embody this view. Specifically, the financial program is based on the frame-work that any increase in liquidity greater than what can be absorbed as balances will bring about undesirable effects on prices and the balance of payments. It is on this same subject of money demand estimation that this study has focused. The stock adjustment and adaptive expectations mechanisms have been incorporated so that the model pays attention to the influence of expected income, expected inflation rate and expected degree of credit restraint on desired real balances. The role of income and inflation rate as explanatory variables follows from a straight-forward application of general demand theory which emphasizes the importance of a budget constraint and substitution effect. Real assets may not be the only important substitutes to holding money but financial assets as well. But because market-determined interest rates may be inoperative, as in the case of the Philippines prior to the complete deregulation in 1983, an indicator for the degree of credit restraint can be used as a proxy variable. Its inclusion can serve to capture the feedback effect of non-price credit rationing on holdings of liquid assets. It also bears importance on the formulation of a financial program as asset holders may attempt to realize planned expenditures or extend credit to deficit units by dishoarding/decumulating their liquid balances, thus obliterating the intended effects of contractionary measures implicit in a financial program and calling for a revision of the target ceiling on credit expansion. The regression results on the short-run money demand estimation conform with a priori expectations. They also suggest that the demand for liquid balances is likely to be overestimated when the feedback effect of credit restraint measures is neglected. An iterative linearization technique for constrained non-linear estimation was employed to simultaneously identify all the structural parameters comprising the money demand relation. The results indicate that there is some lag involved in acting on errors with regard to the expected values of the explanatory variables. Based on a priori reasoning, the delay can be due to the insufficiency of information and if, on the contrary, the necessary information is available, it is plausible that the lag is brought about by costs in obtaining and processing the information. However, as implied, by the value of the adjustment elasticity of close to unity, money balances are brought to the desired level once the needed additional information is obtained and processed and expectations are already formed. The high long-run income elasticity of above unity suggests that over time, an increasing amount of income has been saved in liquid assets. The estimated long-run price elasticity of near unity, on the other hand, can be traced to the pronounced and variable inflation during the major part of the period under study.