Central Bank policies and the behavior of the money market : the case of the Philippines

This study attempts to relate policies of the Central Bank with the behavior of the money market. The money market is defined as the short-term financial market covering instruments that are close substitutes for money. By convention, only instruments with a maturity of less than sixty days are analyzed although data for instruments with longer maturities are presented. Based on the observation of the abovementioned performance measures, it can be generally concluded that regulations prior to 1981 produced a less efficient but more stable market. During the liberalization period, the behavior of the money markets was significantly affected by the Dewey Dee crisis in 1981 and the balance-of-payments (BOP) crisis in 1983 which led to the 1984-1985 recession. Since data on the money market for 1981 were not provided by the Central Bank, the assessment of key events focuses only on the effect of the BOP crisis. The Central Bank's main policy instruments during the crisis were the controversial "Jobo" bills which carried artificially high interest rates to arrest capital outflows. Stability in the monetary system was achieved but at the expense of operating efficiency. Transactions in the money market instruments, excluding Treasury bills and interbank call loans, declined rapidly during the period 1983-'85 and have since not recovered. 'Hiis paper, thus, clearly points out the trade-off between operating efficiency, on one hand, and stability, on the other.