posted on 2024-09-05, 22:36authored byJoseph Y. Lim
Since the late 1960s, there has been strong resistance from many quarters against any form of
devaluation, in sharp contrast with the near-unanimous call of economists for a realistic depreciation
of the currency in order to encourage exports, foster economic competitiveness and efficiency, and
avoid perennial balance-of-payment crises.
The diammetrically opposed positions are further polarized today as many in the private sector -
- from big business to militant labor and even small farmers -- consistently oppose devaluation. Their
resistance has silenced policymakers who espoused realistic exchange-rate adjustments. The private
sector sees devaluation as stagflationary: increases in the domestic cost of imports contract output and
aggravate price inflation (e.g. Krugman and Taylor 1978).
Empirical studies incorporating the exchange rate in a supply-side macro model corroborate the
above intuition (see Bautista et al. 1992). This study, however, will try to show that if exchange rates
are fixed, then it would be misleading to use them in macro-supply equations to represent the shadow
exchange rate, or as the measure of the scarcity of foreign exchange. For in a fixed exchange-rate
regime, foreign exchange may be scarce and exchange rates low, so that the exchange rate will not
reflect the true economic cost of foreign-exchange scarcity. It is appropriate in this case to include the
international reserves as a determinant in output supply, particularly when foreign-exchange controls
are implemented (as they usually are) simultaneously with a de facto fixed exchange rate regime.
History
Publisher
Philippine Institute for Development Studies
Citation
Lim, J.Y. (1992) A study on Philippine exchange rate policies. Working paper series, 9209. Manila: PIDS.