Impact of Reserves Accumulation Nikkin L. Beronilla National Anti-Poverty Commission November 2014
Two ways to accumulate reserves 1. 2. Foreign debt issuance – w/ interest Buy $ in foreign exchange market – no interest
1. Foreign debt not increasing
2. Increase in GIR happens when there is appreciation pressure
Tracing the Impact of Exchange Rate Intervention • Exchange Rate Intervention and Money Supply (10) • Money Supply and Inflation (6) • Exchange Rate Intervention, Exports and Imports (3) • Exchange Rate Intervention, GDP and Employment (2)
Figure 5. Framework Summary Central Bank Intervenes International Reserves × GI R ₱/$ Ms = m × E* Exchange Rate Money Supply Export Price [px$] Import Price [pm₱] X = qx × px $ M = qm × pm₱ GDP = C+I+G+(X-M) Inflation GDP = fn(K, L) Employment
Figure 6. Snapshot of System I Equations Ms = m × E*₱/$ × GIR Exports Imports Employment Inflation Figure 7. Snapshot of System II Equations Ms = m × E*₱/$ × GIR Exports Imports Employment Inflation
![SYSTEM I EQUATIONS log(M 2) = constant + log(exchange rate) + log(GIR) [22] inflation](https://present5.com/presentation/6086dadf3bb63a2639876cf7c692b305/image-8.jpg "SYSTEM I EQUATIONS log(M 2) = constant + log(exchange rate) + log(GIR) [22] inflation")
SYSTEM I EQUATIONS log(M 2) = constant + log(exchange rate) + log(GIR) [22] inflation = constant + log(exchange rate) + log(GIR) + inflation t-1 [23] log(export) = constant + log(exchange rate) + log(GIR) [24 a] log(import) = constant + log(exchange rate) + log(GIR) [25 a] employment = constant + %export + %import. [26] SYSTEM II EQUATIONS log(M 2) = constant + log(exchange rate) + log(GIR) inflation = constant + log(exchange rate) + log(GIR) + inflation t-1 log(exports) = constant + log(M 2) + log(imports) = constant + log(M 2) + log(exports) employment = constant + %export + %import. [22] [23] [24 b] [25 b] [26]
Data Set & Methodology • Variables – GIR, M 2, ex rate, X, M, inf, employment, GDP • The dataset – 1997 to 2013 q; 17 years; 68 data pts • The rolling SUR 1997 q 1 2008 q 4 2013 q 4
System I: log(M 2) = constant + log(exchange rate) + log(GIR)
System I: Infl = const + log(ex rate) + log(GIR) + Inflationt-1 Inflation=0. 8* inflation(t-1) + error 99% confidence interval Inflation=1* inflation(t-1) + error
System I : log(Exports) = cons + log(exchange rate) +log(GIR)
System I: log(Imports) =cons + log(exchange rate) + log(GIR)
System I: Employment = constant + %exports + %imports
System II: log(Exports) = constant + log(M 2) + log(Imports)
System II: log(Imports) = constant + log(M 2) + log(Exports)
Simulation Impact of $5 bn additional reserve
Summary • GIR no impact inflation – Random walk • GIR impact on X & M is positive – X and M are closely linked • GIR impact on employment minimal to 0 • Ex rate - no impact in recent years – CB is not accumulating reserves recently • GIR has impact on X, M and Employment – If the government/economy can decouple exports and imports – Exports w/ raw materials locally sourced
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