Fixed exchange rate for RP possible if ...

Business World, November 16-17, 2007

THE Philippines can only resort to a fixed exchange-rate system to achieve a more stable economy if it has achieved a balanced budget and if there is strong leadership in the government, Nobel laureate for economics Robert Mundell said on Thursday.

Speaking to reporters after delivering the first of a series of lectures organized by the International Peace Foundation to bring Nobel laureates to Southeast Asia, the professor asserted that any country, including the Philippines, can implement a fixed exchange rate system "anytime it is prepared for it."

"You have to have a balanced budget and enough foreign reserves [among others], and if government officials, agree with it and have decided on what the exchange rate is going to be," Mundell said in an interview after his speech at the De La Salle University, one of the sites of the lecture series dubbed "Bridges:' Dialogues Toward a Culture of Peace."

He proceeds to the Ateneo de Davao University on Friday, November 16.
Mundell explained that having fixed exchange rates means a process in which the central bank fixes the price of foreign exchange and allows the money supply to move in a direction that keeps the balance of payments in equilibrium."

In his debate with economist Milton Friedman, Professor Mundell said that for countries, with lower rates of inflation-or about 5 percent a year-a fixed exchange rate could be the best monetary rule that the central bank can adopt.

This year, the country's inflation rate has been within 2.2 percent to 3.9 percent. The Bangko Sentral ng Pilipinas (BSP) is projecting full-year inflation this year to be between 3 percent and 4 percent.

"Equilibrium under fixed exchange rates means that the country's money supply is directed by its balance of payments. When the balance is in surplus, the money supply expands and that increases expenditure in goods and securities and that corrects its surplus," he said.

However, he said not all currencies can adopt the fixed exchange rate at present. An example, Mundell said, would be the US. In his debate with Dr. Friedman, he had said that big countries like the US cannot fix its currency to smaller countries.

Nevertheless, Mundell said a fixed exchange rate with the dollar is a viable alternative for countries like Canada or Mexico and other Latin American countries.

Mundell is considered one of the foremost experts in the field of international economics and was the expert who prepared the first plans for a common currency in Europe or the development of the Euro.