The significance of exchange rate in the Philippine trade balance position
| dc.contributor.advisor | Montes, Manuel F. | |
| dc.contributor.author | Cruz, Ofelia D. | |
| dc.date.accessioned | 2024-10-17T06:28:20Z | |
| dc.date.available | 2024-10-17T06:28:20Z | |
| dc.date.issued | 1986 | |
| dc.description.abstract | Exchange rate changes has been one of the policy tools prescribed by the International Monetary Fund to countries whose balance of payments position is in "fundamental disequilibrium". To what extent exchange rate instrument is effective in the Philippines is pursued by this paper through an empirical work which takes account of the quantitative influence of exchange rate policy on our trade balance position. Significant theories offer explanations on the effect of currency depreciation on the exports and imports. These are the elasticities approach, which provides the criteria for a devaluation to improve the trade balance in terms of separate elasticities for exports and imports; the absorption approached which sees that a devaluation will increase the gap between total output and domestic expenditure; and the monetary approach which views devaluation as a reduction of money supply and consequently local spending because of the attendant rise in domestic prices. A critical evaluation on the role of depreciation is that held by the structuralists' school which noted how the structural characteristics of developing countries alter the analysis of exchange rate adjustment on these countries. Their argument focuses on the elasticity pessimism, the inelasticity of demand for imports and the low supply elasticity for exports as well as the contractionary effects of devaluation which makes it less effective in the developing world. The empirical analysis of the trade balance shows that it is not the contemporaneous value of exchange rate but the lagged values of exchange rate up to a period of two years which influence trade balance. The direction of influence of the first lagged value is positive, while the second lagged value is negative. This points out that the path taken by an exchange rate action is more of the monetary approach, that where the currency depreciation is only causing a temporary improvement in the trade balance. Holding the exchange rate fixed will consequently lead to the deterioration of the trade balance because such exchange rate is no longer responsive to cause the same contraction in domestic spending. This shows that the way in which we depreciated our currency in the past did not provide continued stimulus to our exports and reduction of our expenditure on imports. One reason is that exchange rates have not been set into competitive levels. The use of effective exchange rates, both nominal and real showed that the peso is still overvalued in real terms. It is the inflation-adjusted nominal exchange rate (REER) and not the nominal exchange rate that matters. Thus even if the peso depreciated in nominal terms, there has been loss in competitiveness because of the appreciation of the currency in real terms. Such appreciation could be attributed to the high rate of domestic inflation over that of other countries which might have been the result of improper internal demand management policies including the exchange rate policy itself. Among the demand management policies, the fiscal deficit shows significance and a negative reaction attesting to the inappropriateness of too much government spending in the past which contributed to the widening of our deficits. Likewise external factors play important roles in affecting our merchandise account as exhibited by the significance of the terms of trade, and growth rate of industrial countries variables. The estimates of the coefficients of these variables suggest that exchange rate policy exerts a relatively high quantitative importance over other policy variables and external factors affecting the trade balance/GNP ratio. The finding that it is the real and not the nominal exchange rate that matters in influencing the trade balance bears important implications. Since the latter is affected only by exchange rate policy while the former is a result of some other policies (monetary, fiscal and wage policies) which influence relative prices, the use of exchange rate in improving the trade flow is meaningful only if accompanied by the appropriate demand policies. The monetary authorities should therefore aim at the appropriate real rather than the nominal effective exchange rates. With respect to the manner in which exchange rate adjustment has to proceed, the paper shows the limitation Of the kind of currency depreciation that we did in the past (limited depreciation followed by sudden large depreciations) and instead calls for a more flexible exchange rate which is responsive to currency realignments and inflation of its trading partners. The system of gradual but continuously changing exchange rates will likely reduce speculation and will make adjustments to the attendant consequences of that exchange rate action far more easy. | |
| dc.identifier.uri | https://selib.upd.edu.ph/etdir/handle/123456789/753 | |
| dc.language.iso | en | |
| dc.title | The significance of exchange rate in the Philippine trade balance position | |
| dc.type | Thesis |