Investigation of the Factors Affecting Real Exchange Rate in the Philippines

This paper aims to investigate the factors affecting the real exchange rate in the Philippines from 1973 to 2014, namely gross domestic product, volume of money flow, net foreign assets, budget deficit, import restrictions, and oil prices. The study used the unrestricted vector autoregressive model in order to properly investigate the response of the real exchange rate to the different macroeconomic variables. The Johansen Cointegration test shows that there are no evidences of long-run cointegration between the dependent variable and the independent variables. Variance decomposition showed that GDP and volume of money flow accounted for most of the real exchange rate movement. All variables except oil prices has a positive relationship to real exchange rate in the Philippines. The results of the study may aid the government (including the central bank) to focus on what factor should they improve or balance in order to maintain a stable foreign exchange market