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Abstract
This note examines the empirical validity of the monetary model of exchange rate determination for The Philippines via cointegration and vector error-correction model. It is found that the monetary model is a valid framework for the long-run exchange rate between Philippines peso-US Dollar exchange rate. However, the typical linear restrictions of flexible-price monetary model and proportionality between the exchange rate and relative money are rejected.
Notes
1 Husted and MacDonald (Citation1999) employed unrestricted flexible-price monetary model to examine the exchange rates misalignments for nine Asian countries, namely Australia, India, Indonesia, Korea, Malaysia, New Zealand, The Philippines, Singapore and Thailand; while Chinn (Citation2000a, Citationb estimated a monetary model of exchange rates augmented by productivity trends for Indonesia, Korea, Singapore, Thailand and Taiwan.
2 For a comprehensive discussion see MacDonald and Taylor (Citation1992) and Taylor (Citation1995).
3 The model has passed the normality, serial correlation, heteroskedasticity and stability tests. These results are available upon request from the authors.
4 As in Taylor and Peel (Citation2000) and Kilian and Taylor (Citation2003).