Monetary and Exchange Rate Policy

Abstract

AbstractExamines the evolution of monetary policy rules and exchange rate regimes in the Philippines over the past two decades. It highlights the importance of recognizing the interdependence of exchange rate and monetary policies in a small open economy, and argues that failure to appreciate this has yielded undesirable consequences. To illustrate, it discusses the macroeconomic performance following regime shifts for various periods: (1) the eighties to early nineties when observed money growth not commensurate with growth in foreign reserve assets under exchange rate targeting caused episodes of peso collapse; (2) capital account liberalization – culminating in full peso convertibility in 1992 – which compromised the ability to conduct an independent monetary policy; and (3) the financial crisis years when it became apparent that fixing the exchange rate in a world of capital mobility was futile. The paper concludes by raising institutional issues and reviewing the conduct of monetary policy in the more recent postcrisis period.