price stabilization measures and its effects on - Philippine Institute ...

With the devaluation of the peso, holding other factors constant, this should makePhilippine exports competitive in the world market. However, during the financial crisis,exporters were not able to take advantage of the opportunities due to the lack of capital<strong>and</strong> other markets that were not affected by the financial crisis. The government shouldhelp develop other markets for Philippine exports to minimize the impact of economicdisturbances. In addition, the government should assist the export sector in improvingthe skill <strong>and</strong> capabilities of their workers to be efficient in the production of their output.Likewise, the government should help promote the country's export products in othercountries that are not importing Philippine products.3. Broaden the tax base <strong>and</strong> improve efficiency in tax collection. The budget deficitexperienced by the country for so many years was partly attributed to low tax collection.Government budget defic<strong>its</strong> if not corrected, sooner or later, have to be financed throughmoney creation, which is inflationary. With the broadening of the tax base <strong>and</strong> efficienttax collection, the fiscal deficit could be minimized thus easing the pressure on interest<strong>and</strong> exchange rates which will help stabilize <strong>price</strong>s.4. Institute BSP Monetary Measures. The BSP has at <strong>its</strong> disposal a number of monetarypolicy <strong>measures</strong> that can eventually influence the movement of <strong>price</strong> levels. Theseinclude regulation of money supply, prime interest rates, <strong>and</strong> reserve requirement rates.While these are usually used to influence credit conditions, the investment climate, <strong>and</strong>eventually output <strong>and</strong> employment, these variables can also be used to influence inflationrates. The BSP has kept <strong>its</strong> h<strong>and</strong>s off the dealing floor, allowing the peso to fluctuate <strong>and</strong>seek <strong>its</strong> market rate. While a strong peso can be used to dampen inflationary pressures,this policy is only correct to an extent in the short term. Furthermore, the cause ofinflation should be determined. The current inflation is not a monetary phenomenon buta cost-push one combined with <strong>and</strong> “El Niño” supply shock or a structural defect. Inaddition, the BSP should be more active in monitoring <strong>and</strong> supervising the financialsystem to prevent defaults in the banking system (e.g., Orient Bank, Monte de Piedad,etc.).Issues on the Adoption of Inflation Targeting In Developing CountriesInflation targeting is a framework that be used to conduct monetary policy in order tomaintain a low <strong>and</strong> stable rate of inflation. Its adoption would indicate the strongest possiblecommitment by the monetary authorities to deal with the danger of inflation.In an internet article entitled "The Eternal Triangle", Krugman (1999) argued thatcountries face a dilemna in choosing <strong>its</strong> monetary regime. The three main goals of adjustment,confidence <strong>and</strong> liquidity conflict with one another; choosing one implies dropping the otherobjective. Following Krugman's definition of the three objectives, it looks like the Philippinegovernment is trying to strike a balance between the above-mentioned goals. It is allowing thepeso to float, while keeping interest rates low <strong>and</strong> inflation at manageable rates. In effect, theadministration is putting a premium on adjustment <strong>and</strong> liquidity, but at the same timemaintaining a relatively stable exchange rate by allowing the currency to float within a b<strong>and</strong>.19