Divisia monetary model of exchange rate determination: The case of philippines

Abstract

In literature, inferior performance still prevails as one of the unresolved issues with regard to the monetary model of exchange rate. A money demand function that is unstable can contribute to the inferior performance of the model. One of the causes for an unstable money demand function is the application of the simple sum monetary aggregate in the estimation. Therefore, an alternative measurement of money, the Divisia monetary aggregate, is applied in the estimation of the monetary model of exchange rate. The results show that cointegration exists between monetary fundamentals and the exchange rate in the Divisia model. Consequently, to estimate the exchange rate for the Philippines, The Divisia monetary aggregate can be used as an alternative money supply.