This paper constructs a model of Exchange Market Pressure (EMP) applicable to a small open emerging country that is characterized by a non-existing exchange rate pass-through for exports, but by an exchange rate sensitive demand for money. Philippines is selected for this empirical analysis because (1) it is a small country that satisfies the postulated characteristics, and (2) it has changed its exchange rate regimes several times.

This paper focuses on the effectiveness of intervention by the Philippines monetary authority conducted to mitigate EMP.  The original formulation of EMP as devised by Weymark (1995, 1997) may not be applicable to all countries, especially those countries who have not been well-integrated in the world commodities and/or capital markets. Thus, when we consider the EMP for developing or emerging countries that are vulnerable to currency or financial crises, we have to generalize or at least modify the underlying model of EMP, retaining the basic, model-consistent measure, to adjust to the characteristics of those countries. The purpose of this paper is to propose our modified measure of EMP, and its application to a small developing country as an empirical exercise.

Data:

We selected Philippines, since it has been recognized as being a small country without well-integrated markets for both commodities and capital transactions internationally. Another important reason for selecting Philippines lies in the fact that they have been widely recognized as having changed their exchange rate arrangements frequently, based on close examination of the movements of the de facto exchange rate (Bubula and Ötker-Robe, 2002; Levy-Yeyati and Sturzenegger, 2005). One outstanding advantage of EMP is that it can be applied across exchange rate regimes (Van Poeck, Vanneste and Veiner, 2007). The quarterly date covers 1990:1 to 2007:3. The source is IMF-IFS on-line.

Results:

It is concluded that the overall intervention activity of Philippines' monetary authority was successful over the sample period.