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1 INTRODUCTION The paper also discusses what factors affect the strengthening and weakening of the Philippine Peso

. This paper also includes an in depth analysis of how the foreign exchange could affect and gets affected by the economy. Aside from factors such as inflation, interest rates and foreign direct investment the exchange rate is one of the most important indicators of good economic growth rate of its country.

Exchange rates play a vital role in a country's level of international trade and investment, in order to allow businesses to convert one currency to another currency. This is critical to most every free market economy in the world. Exchange rates are among the most watched, analyzed and governmentally monitor the developments in financial markets in the Philippines and abroad to ensure that exchange rate movements remain consistent with fundamental trends. Exchange rates matter on a smaller scale as well: they impact the real return of a portfolio foreign investment.

The paper is organized in the following manner: In Section III, the researcher discusses the theoretical framework related to the study. On Section IV-I, the

researcher will introduce the model. Section IV-II, the researcher presents the empirical model. In Section IV-III, the researcher presents the sources of data. On Section IV-IV and, the researcher present the result. On Section V concludes the study.

except possibly for highly inflationary economies. This study is anchored on The Theory of Exchange Rate Determination invented by Michael L. Mussa examines one of the implications of these general facts is that no simple model of exchange rate determination provides an adequate explanation of most of the observed movement in nominal and real exchange rates under a floating exchange rate regime. which suggests that exchange rates adjust either immediately or gradually to maintain balance of payments equilibrium. Michael L. such as common stocks.2 THEOTERICAL FRAMEWORK This section presents relevant studies reviewed by the researcher to obtain a better understanding of the problem understudy. and various metals and agricultural commodities. long-term bonds. there tends to be a strong . A naive monetary model that relates exchange rate movements to differential rates of monetary expansion (with or without some form of lagged adjustment) does not perform appreciably better in explaining the bulk of exchange rate movements. A second important implication of the observed characteristics of the behavior of exchange rates and related variables concerns the general conception of exchange rates as “asset prices. Mussa in 1984 called the Theories of Exchange Rate Behavior.” Exchange rates share many of the general behavioral characteristics of the prices of assets that are traded on organized exchanges. For assets with quoted spot and future prices. like monthly changes in exchange rates (but unlike monthly changes in consumer price indices) are largely random and unpredictable. Monthly changes in the prices of these assets. The bulk of observed movements in exchange rates cannot be explained by a naive “payments flows” model. A naive PPP explanation (not really a theory) of exchange rate movements also performs rather poorly.

The reason for this linkage is that if there were a substantial expected rise in the price of the asset over the course of a month. These common characteristics in the behavior of prices of assets traded in organized markets suggest that there should be important common elements in the theory of the behavior of such prices. Monthly changes in the prices of assets traded in organized markets are not closely correlated with monthly changes in the general price level. we ought to expect that the price today would be reasonably closely linked to the price that is expected at some day in the near future. implying that most nominal price changes are also real price changes. putting upward pressure on its current price and downward pressure on its expected future price. In particular.3 correlation between changes in spot prices and contemporaneous changes in futures prices. indicating that changes in spot prices are largely unanticipated and correspond fairly closely to changes in the market’s expectation of future spot prices. for any asset that may be held in inventory at a relatively small storage cost and bought and sold with a relatively small transaction cost. such as a month hence. individuals would have a strong incentive to acquire and hold the asset. . as measured by the consumer price index. until the difference between these two prices was brought within the limits implied by storage and transactions costs.

S Dollar and the five variables affecting discussed earlier.S Dollar . and Foreign Interest Rates has verifiable existence. Consumer Price Index.S Dollar (2) OFWREM= Overseas Filipino Workers Remittances (3) TRADE= Total Foreign Trade of United States to Philippines (4) CPI= Consumer Price Index (5) PPP= Purchasing Power of the Peso (6) INT= Foreign Interest Rates THE EMPIRICAL MODEL The objective of this section is to test if which of the above relationship between the Philippine Peso per U. The researcher then has a functional statement as: FX Rate= f (OFWREM.4 THE MODEL The objective of this section is to test the relationship of Philippine Peso per U. INT) Where: (1) FX Rate= Philippine Peso per U. The researcher has the following empirical model: FX Rate = β1+β2OFWREMt+β3TRADEt+β4CPIt+β 5PPPt +βINT+t Where: FX Rate = dependent variable . Purchasing Power of the Peso. Total Foreign Trade of United States to Philippines. PPP. TRADE. The estimation method is ordinary least square method. CPI. Overseas Filipino Workers Remittances.

β5 and β = partial regression coefficient  = stochastic disturbance term SOURCES OF DATA This context was carried out in the Philippines. by the availability in the period of 1990 – 2009.S Census Bureau).S Dollar.5 β1 = intercept term. Philippine Peso per U. β3. β4. National Quickstat (A Monthly update of Philippine Statistics) of National Statistics Office (NSO) and Foreign Trade Statistics (U. Consumer Price Index. . Purchasing Power of the Peso and Foreign Interest rates is obtained in the key statistical indicators of Bangko Sentral ng Pilipinas (BSP). Overseas Filipino Workers Remittances. gives the mean or average effect on FX RATE of all the variables excluded from the model β2. Total Foreign Trade of United States to Philippines.

S Dollar (1990-2009) 60 55 50 45 40 35 30 25 20 90 92 94 96 JAN FEB MAR APR 98 00 02 04 06 SEP OCT 08 MAY JUN JUL AUG The high levels of volatility in the 1990s because of energy crisis hit the economy.08/US$ on 12 March 2003.50/US$ range during the first two weeks of April.6 THE PRESENTATION. The peso continued to gain ground against the US dollar. The peso has been depreciating against the US dollar to reach a six-month low average of P56. The recovery.50. the peso has recovered to trade within the P53. was due in part to the reduced uncertainty in the Iraq situation as the market priced in a quick resolution of the conflict in the Middle East.P52. The low levels of volatility in the early 2000s because of the 1997 Asian Financial Crisis. which started around mid-March. The depreciation of the peso was . Since reaching a low average of P55.42/US$1 on 27 September 2004. ANALYSIS AND INTERPRETATION OF DATA Figure 1: Line graph representing The Philippine Peso per U.

including higher corporate dollar demand by corporate to cover import requirements (including oil and other requirements for the Holiday season) and to service month-end and quarter-end foreign exchange obligations. and now comprises over 10 percent of the country’s gross . the Philippine peso emerged as one of the top performing currencies in Asia and hit a 7 ½-year high of P41/US$1 in December 2007. dollars (Yr 1990-2009) 1600000 1200000 800000 400000 0 90 92 94 96 JAN FEB MAR APR 98 00 02 04 06 SEP OCT 08 MAY JUN JUL AUG Remittances from overseas Filipino workers has kept the Philippine economy afloat during times of crisis. as the Philippine economy grew at its fastest rate in 31 years.S. shows the volatility tries to recover. In 2007. From 2005-2009. Figure 2: Line graph representing The Overseas Filipino Workers Monthly Remittances in thousand U.7 mainly on account of seasonal factors.

In 1998.618 billion even the Philippine economy deteriorated because of the Asian financial crisis. OFW remittances hit US$ 16. The 2008 growth rate of remittances was faster than the 13. In 2009. 2400 2000 1600 1200 800 400 0 90 92 94 96 JAN FEB MAR APR 98 00 02 04 06 SEP OCT 08 MAY JUN JUL AUG . Figure 3: Line graph representing Total Foreign Trade of United States to Philippines (Yr 1990-2009) In Million U.22% against 1997’s US$ 5. In 2008.989 billion a decrease of 14. From 1999-2004 US$ 28. the government projects OFW remittances to increase by five percent to $14.367.4 billion.835 Billion.8 national product (GNP).8 billion.7 billion making government debt payments cheaper and stimulating spending by consumers. In 2005 OFW Remittances hit US$ 10.6% than 2008 to hit US$ 17.S Dollars. according to the Department of Labor and Employment. Overseas Filipino Workers have contributed to the local economy US$ 7. For 2007. total remittances from OFWs reached US$ 12.7 billion.741.356. In 2006.3 billion. grew 5.2 percent in 2007.

did not remain constant.S.S imports rose at 13934. Food Waste and Animal Feed.5% to $7. 16% of its imports came from the US while 18% of the country's exports were bound for US Total of 17311. The highest percentage of sales of Philippines exports to the US were apparently motivated by computers which earned $88 million or 417% up from 2005.8 billion.1 Billion. rose 10.3 Billion. Cereals. gathered a statistical data amounting to US exports to the Philippines of $8294. with total exports of $5.S. The Philippines' foreign trade with US occupies a large portion and in 2006.7% since 2002. and Optic and Medical Instruments Figure 4: Line Graph representing The Consumer Price Index (Yr 1990-2009) 180 160 140 120 100 80 60 40 90 92 94 96 JAN FEB MAR APR 98 00 02 04 06 SEP OCT 08 MAY JUNE JULY AUG . For the year 2008.8 billion Top export categories in 2009 were Electrical Machinery ($2. Machinery.9 The direction of International trade.9 billion.6 Billion less than the Filipino exports to U. The Philippines was the United States' 34th largest supplier of goods in 2009. however. market for goods in 2009. For the year 2000. U. imports of $6. The Philippines was the 30th largest U.6 billion in 2006. Filipino imports from the U.S. with total U. up 4.S at 8799.2 billion).

6 1. which would affect the strategies of investors and traders in the forex trading.2 0. Figure 5: Line graph representing The Purchasing Power of the Peso (Yr 19902009) 2. If a Filipino family has a very low income the purchasing power is low as well.10 The CPI shows how inflation is affecting the Philippine Peso per U.4 90 92 94 96 JAN FEB MAR APR 98 00 02 04 06 SEP OCT 08 MAY JUN JUL AUG Purchasing power estimate ability to command goods.S Dollar.95 because of the global financial crisis. The purchasing power of the peso .8 0. The CPI can also sometimes be affected by a hike in price of a particular commodity. The Highest CPI is on year 2008 rose at 154. The CPI measures of the change over time in the prices paid by consumers for a market basket of goods and services.4 2. A major increase in the price of one commodity can trigger a domino effect.0 1.

. rose at 9.0488% due of global financial crisis. For the year 2000. Figure 6: Line graph representing The Foreign Interest Rates (Yr 1990-2009) 11 10 9 8 7 6 5 4 3 90 92 94 96 JAN FEB MAR APR 98 00 02 04 06 SEP OCT 08 MAY JUN JUL AUG There is an imbalance in interest rates has a heavy reliance on foreign borrowing.11 is measured in terms of the real value of the peso relative to the peso value in the base period.2297% compare to the past years and for the year 2007 at 8. The highest interest rate is on year 1990 which is 10%.

S Dollar as validated by a correlation coefficient of ( r ) 0.549588) (0.0002) (10.235492) (0. In terms of TRADE representing the Total Foreign Trade of United States to Philippines has a positive correlation that exists in Philippine Peso per U.0032 which substantial in 1% level of significance. In terms of OFWREM representing the Overseas Filipino Workers Remittances.85775189 -3.6357OFWREM + 0. it means that if TRADE will be extended at 1%. it means that as OFWREM goes higher.0000 The Regression Analysis Presentation above displays the OLS Regression result.1.0019.58114) (3.699847 2 2 F-statistics = 34. the OFWREM exceeds 2 in the T-stat test having a probability of 0.0019% higher.7156INT Se = (1.0014) (0.56840 Prob (F-statistics) = 0.0032) (0.96.772248) (0.S Dollar as validated by a correlation coefficient of ( r ) -3. Pearson Product was used.6357. if the peso gets lower its means it’s appreciated.0422) T – Stat = P – Value = R = 0. the FX rate will go lower. With its positive correlation.02E-06) (3. thus. With its negative correlation.12 Regression Analysis Presentation FX Ratet = .980601) (0.0021) (0. This variable helps to increase the power of peso.767463) (-2. the null hypothesis stated that there is no significant effect on the Philippine Peso per U. Thus.0014 which . Moreover.898310 Durbin-Watson stat = 1. the FX Rate will grow by 0. the TRADE exceeds 2 in the T-stat test having a probability of 0.994880) (0.S Dollar is rejected.204694) (4.000483) (3.9146PPP . Moreover.925070 R adj = 0. has a negative correlation that exists in Philippine Peso per U.0019TRADE + 1.0224CPI + 39.

it means that if CPI will be extended at 1%. In terms of CPI representing the Consumer Price Index has a positive correlation that exists in Philippine Peso per U. With its positive correlation.S Dollar is rejected. the TRADE exceeds 2 in the T-stat test having a probability of 0. it means that if CPI will be extended at 1%. the FX Rate will grow by 39. the null hypothesis stated that there is no significant effect on the Philippine Peso per U. Moreover.S Dollar as validated by a correlation coefficient of ( r ) 39. the null hypothesis stated that there is no significant effect on the Philippine Peso per U. thus. the null hypothesis stated that there is no significant effect on the Philippine Peso per U.7156. the INT exceeds 2 in the T-stat test having a probability of 0.0021 which substantial in 1% level of significance.0224% higher. With its negative correlation. the null hypothesis stated that there is no significant effect on the Philippine Peso per U. has a negative correlation that exists in Philippine Peso per U. In terms of PPP representing the Purchasing Power of Peso has a positive correlation that exists in Philippine Peso per U. thus.13 substantial in 1% level of significance.0422 which substantial in 1% level of significance. thus. Moreover. the FX Rate will grow by 1. it means that as INT goes higher.S Dollar as validated by a correlation coefficient of ( r ) 1.S Dollar as validated by a correlation coefficient of ( r ) -1.S Dollar is rejected.S Dollar is rejected. the TRADE exceeds 2 in the Tstat test having a probability of 0. .0002 which substantial in 1% level of significance.9146% higher. With its positive correlation. the FX rate will go lower. In terms of INT representing the Foreign Interest Rates. thus.S Dollar is rejected. Moreover.0224.9146 .

TRADE. The F-statistics has a result of 33. the researcher discovers that there is a significant power to affect of five variables on the Philippine Peso per U.14 The R-squared is equal to 0. Government passed the responsibility of the economy to OFWs. PPP and INT account for about 92% of the variation in the value of Philippine Peso per U. instead of generating sufficient jobs domestically. As an Economics Student. CPI.S Dollar 1990-2009. Thanks to our Overseas Filipino Workers (OFWs) who in 2009 contributed USD17. CONCLUSION This paper examines systematically the effect of Overseas Filipino Workers Remittances. Moreover. TRADE.S dollar.S Dollar. OFWs are indeed our “Bagong Bayani” for they are continuously keeping our economy afloat. the proportion of total variation in FX Rate explained by the regression is 89%.8 million a year ago. Purchasing Power of the Peso and Foreign Interest Rates. which demonstrates that OFW. Consumer Price Index. Estimating a time-varying parameter model. CPI. PPP and INT collectively influence the dependent variable. Total Foreign Trade of United States to Philippines.13171 in the regression.3B in our OFWs receipt.924413 meaning that the five explanatory variables OFW. While the Adjusted R-squared of 0. Jobless Filipinos as of April 2010 increased to 3 million from 2. the Philippine peso is stable and definitely getting stronger against the U. on the Philippine Peso per U. The Bangko Sentral ng Pilipinas (BSP) shall continue to monitor the developments in . The stronger peso makes imports cheaper.S Dollar. a not sustainable policy.897418 exhibits that. using an OLS Regression method. Foreign investors should still have some understanding of how currency values and exchange rates play an important role in the rate of return on their investments.

ph/dbank_reports/ExchangeRates_1_rpt. Q&A ON THE EXCHANGE RATE IMPACT: HOW MUCH.ph/downloads/Publications/FAQs/fximpact. Retrieved 21 December 2010.bsp.gov. <http://www.gov.html> ‘Bangko Sental ng Pilipinas’ 2010.asp?frequency=Monthly&range_from= 1990&range_to=2009&conversion=End+Of+Period> ‘Bangko Sental ng Pilipinas’ 2007.bsp.pdf> ‘Bangko Sental ng Pilipinas’ 2010. OFW Remittances.gov/foreign-trade/balance/c5650. Overseas Filipinos’ Remittances. <http://www.asp?frequency=Monthly&range_from=1 990&range_to=2009&conversion=None> . WHAT WE CAN DO. <http://www.bsp. <http://www. Inflation Rate and Purchasing Power of the Peso (Philippines) . Philippine Peso per US Dollar Rates.ph/dbank_reports/Prices_1_rpt. viewed 30 December 2010.cgi?mA=30&result=normal&sort=date&query=ofw+remm itances> ‘U.census.bsp.S Census Bureau’ 2010. Retrieved 30 December 2010. <http://www. <http://www. BIBLIOGRAPHY ‘Bangko Sental ng Pilipinas’ 2007. It shall undertake stabilization policies necessary to promote orderly foreign exchange market activities as a key to sustained economic growth. Exports and Trade Balance) with Philippines.15 financial markets in the Philippines and abroad to ensure that exchange rate movements remain consistent with fundamental trends. <http://www.asp?frequency=Monthly&range_from=1990&ran ge_to=2009&conversion=Average> ‘Bangko Sental ng Pilipinas’ 2010. Retrieved 30 December 2010. Retrieved 30 December 2010.gov. Consumer Price Index. AND WHAT’S NEXT. Retrieved 30 December 2010.census.bsp.gov.gov. Selected Foreign Interest Rates.asp> ‘Philippines National Statistical Office’ 2010.gov. Trade in Goods (Imports.ph/statistics/statistics_online. Retrieved 30 December 2010.ph/dbank_reports/InterestRates_2_rpt.ph/cgibin/namazu.