Financial liberalization and interest rate determination : the case of the Philippines, 1981-1985

Abstract

In this study, an attempt is made to explain how interest rates are determined by both domestic monetary conditions and external factors once the financial sector is liberalized. The empirical model utilized incorporates these domestic and external factors. Monthly, end-of-period data from January 1981 to December 1985 are used. A generalized least squares procedure is used to estimate the model. The study is divided into the following sections. Section II contains a summary of the literature on the role of interest rate in economic development, tne effects of financial repression, ana the rationale behind financial liberalization programs. Section III briefly narrates the interest rate regimes in the Philippines. Section IV discusses the empirical model, explaining the behavior of monetary policy and exchange rate movements. Section V presents the empirical results. Finally, Section VI contains the summary and conclusions of the study.