The BSP, monetary targeting and capital liberalization: 1991-2001
Date
2006-10-16
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Abstract
Financial integration among the world's economies has brought to the fore the importance of capital flows. The surge in capital flows to emerging market economies (EMEs) in the early part of the 1990s signified the rapid integration and development of international capital markets that had been spurred by technological factors, sound economic policy and structural changes [Yap, 2000]. In the Philippine context, the issue of managing capital flows has indeed become a pressing one considering that the Philippines is a developing small open economy that is vulnerable to fluctuations in capital flows. Unrestricted capital flows can wreak havoc on the Philippines' developing economy and this provides the impetus for the intervention of the country's monetary authority, the Bangko Sentral ng Pilipinas (BSP). The BSP, in its conduct of monetary policy, relied on a monetary targeting framework in order to guide its decision-making processes until 2002. The study aims to test if the actions by the BSP in light of capital flows induced price stability as implied by the Quantity Theory of Money. Given that the consequences brought about by capital liberalization made it more difficult for the conduct of monetary targeting, we wanted to know if the BSP really did pursue monetary targeting as it had publicly stated. Based on the results, the movements of the money supply and the interest rates (market rates and policy rates) followed theory -interest rates tend to be more volatile than money since the money supply was the variable that was being kept as stable as possible and the tool for attaining stability were the policy rates. However, the mere fact that the BSP attempted to gain to some degree the control over the exchange rate presents the issue pertaining to the efficacy of the monetary policy brought about by the Impossible Trinity.
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Central bank, Monetary policy, Capital capitalization, Banking system, Financial system