Exchange Rate Management and the External Debt Burden: The Case of the Philippines

Riccardo Faini and Daniela Gressani

Review of Development Economics, 1998, vol. 2, issue 2, 123-139

Abstract: The paper develops a simple macroeconomic model which is then estimated for the Philippines. Econometric evidence shows that Philippines monetary authorities have been reluctant to allow a real devaluation, because of a large public external debt and for the fear of fueling inflation. Simulations show that, while an overvalued exchange rate may bring some benefits in the form of lower inflation and improved budgetary performance, its current account costs may be significant. Brady‐like deals can reduce fiscal imbalances, limit the sensitivity of fiscal aggregates to the exchange rate, and increase the benefits of a more aggressive exchange rate policy.

Date: 1998
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