Monetary policy and exchange market pressure: The case of the Philippines

This study examines how monetary authorities respond to exchange market pressure (EMP) and tests whether traditional monetary prescriptions of contracting money to lend strength to a currency are valid in the case of the Philippine peso. Monthly data for the period 1990.1-2000.4 and a VAR methodology in Tanner [Tanner, E.C., 1999. Exchange Market Pressure and Monetary Policy: Asia and Latin America in the 1990s. IMF Staff Papers 47 (2001). Originally IMF Working Paper 99/114 (August 1999); Tanner, E.C., 2002. Exchange Market Pressure, Currency Crises, and Monetary Policy: Additional Evidence from Emerging Markets. IMF Working Paper WP 02/14 (February 2002)] are used. In general, it is found that contracting domestic credit growth and raising the interest rate differential both reduce EMP. In crisis periods, however, authorities responded differently to EMP. They chose not to sterilize and instead contracted domestic credit growth. The possibility of a perverse effect from raising domestic interest rates cannot be ruled out.