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AER 2008-05: Temper the Appreciation, says GMA. Is that Enough?

The appreciation of the Philippine peso poses a concern for the economy. The BSP has reacted by purchasing dollars and liberalizing the outflow of capital. The intent of these measures, however, is to slow down the peso appreciation and to smoothen the price fluctuation. The measures--and they are indeed welcome--are not intended to induce a reversal that leads to a competitive exchange rate. What a competitive exchange rate is debatable but at the very least the peso should not be overvalued. It can be remembered that an overvaluation of the Philippine peso preceded the 1997 financial crisis. The current overvaluation has not reached the same level but is already a cause for alarm. However, policies should not stop at preventing overvaluation; they should also result depreciation. Actually, an undervalued currency is preferred. This is the lesson of the successful developing countries, that is, an undervalued currency is a necessary condition to achieve sustained high-growth rates over a long period. Empirical works such as those by Dani Rodrik have confirmed this.

Action for Economic Reforms
Authors Keywords
Sta Ana III, Filomeno; monetary policy; exchange rate; peso appreciation;
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Published in 2008 and available in the AER website or can be downloaded as full text Downloaded 618 times since November 25, 2011