Silviase/jgov_v1.4_full_ann huggingface dataset:
inflation, and from October of 1984, adopted the flexible exchange rate system.

The basic stance of the exchange rate policy of the Philippines was to fix the Peso rate of the US dollar for as long as possible, which resulted in serious delay of the adjustment, and constantly overvaluation of real exchange rate. It has been frequently pointed out that the exchange rate adjustment was done only when the situation reached a crisis.

#### A.2.3 Method of the response function

We adopted a simple policy reaction (response) function to analyze factors affecting the exchange rate determination. The data of exchange rate used are nominal exchange rate per US dollar at the end of the each period. The reaction function applied in this Appendix 2 is not quite as same as the one we applied in the case of monetary policy. In the analysis of the monetary policy, we used reaction function with an adjustment mechanism to achieve desirable level of the money supply. In the case of the exchange rate, a simpler form of reaction function which only includes lagged dependant variable was chosen. $ ^{7} $

$$ \mathbf{e}\mathbf{r}=(\dot{\mathbf{g}},\dot{\mathbf{i}},\dot{\mathbf{p}}\dot{\mathbf{c}},\dot{\mathbf{p}}\dot{\mathbf{w}},\Delta\mathbf{R},\dot{\mathbf{e}}\dot{\mathbf{x}},\Sigma\mathbf{B}\mathbf{P}) $$

The explanatory variables are growth rate of real GNP, growth rate of industrial production index, consumer price inflation, wholesale price inflation, change in international reserves, growth rate of export volume and accumulated current account balance. In the reaction function analysis, we applied maximum likelihood method when the country concerned is adopting a flexible exchange rate system. When the country concerned is basically adopting a fixed exchange rate system, but adjusting the exchange rate in a discrete manner, we also applied the Probit method. In the Probit method, independent variables are set at 0 and 1. When there is substantial devaluation of larger than 5%, variable is set at 1 in that period, and if there is no substantial devaluation, variable is set at 0. In this study, we have limited our attempt at single variable regression analysis in order to specify the effect of each variable. The joint regression of multiple variables is not attempted in this study.

In this case, we assumed that authorities will adopt counter-cyclical policy to mitigate the adverse effects on the real economy. Signs of the coefficients on the reaction functions are shown in Table A2.1. The difficulties interpreting the signs on the response function mainly stem from the fact that there are many factors determining the
exchange rate. The most difficult issue is how to evaluate the “correct” sign of each coefficient.

The following assumptions were chosen as a policy response by the authorities. Sign on the coefficients on real GNP or real GDP, and industrial production index is considered as positive. We assumed that when economic growth is declining, authorities try to boost it by the devaluation of the exchange rate through the increase of exports. On the inflation rate, we assumed that the authorities devalue the foreign exchange rate to prevent the real exchange rate from being overvalued when inflation is proceeding rapidly. Therefore, we assume that the sign of the coefficient is positive. We judged that the policy of that authorities of revaluing the exchange rate to prevent inflation is an inappropriate response. On the sign of the coefficient on the growth rate on exports, we assumed negative sign to mean that authorities devalue the exchange rate when the export volume declines. Whether the export is elastic to relative prices or not, we consider this to be an appropriate policy response of the authorities. Sign on the change of reserves is also difficult to interpret. In a very simple situation when monetary authorities are not intervening in the foreign exchange market, we can assume as in a textbook case that the level of external reserves declines and authorities devalue the exchange rate to restore the initial level of external reserves. On the contrary, in a situation when authorities intervene in the foreign exchange market, a different situation might occur. For example when there is an expectation of devaluation and pressure in a foreign exchange market to sell local currency, if the exchange rate system is perfectly flexible and monetary authorities do not intervene, exchange rate will depreciate without losing reserves. But if authorities try to avoid depreciation by intervening in the foreign exchange market, the authorities will lose the international reserves. In this case, analyses based on reaction function might be not an appropriate tool for examining the response of authorities because their intention is to keep the nominal exchange rate constant, which in this case is considered as no response on the exchange rate policy. Noticing these difficulties, we will assume the former case which means that if there is a decline in reserves, authorities devalue nominal exchange rate.

In this exercise, we have formulated reaction functions on the current account balance in the following way. First, we formulated a reaction function of which the explanatory variable is a current account balance of the previous period. Then we applied the accumulated current account balance of previous two periods, previous three periods and so on, until previous eight periods. From this analysis, we tried to examine how the authorities decide to devalue exchange rates on the different degrees of accumulated current accounts balance. In this case, the sign on the coefficient is ___.
assumed to be negative, which means that when accumulated current account surpluses decline or deficits increase, authorities devalue the exchange rate.

#### A.2.4 Analyses of the reaction function

In this section, we will analyze the results of the reaction function and try to determine targets of exchange rate policy.

##### A.2.4.1 Japan

The results of the reaction function of Japan are shown in Tables A2.2 and A2.3. In the case of Japan, the period chosen was from 1973 to 1990 which was in the floating exchange rate period, therefore we applied maximum likelihood iterative method.

The coefficients on the growth of real GDP and industrial production were negative but low t-values show insignificance of the explanatory power. When we look at the coefficients of growth of real exports, both sign and the t-value are insignificant. As for the coefficient on inflation rate, sign on the wholesale inflation shows correct sign with insignificant t-value, and on consumer inflation show opposite sign with insignificant level. Table A2.3 shows the results of reaction functions on the accumulated current account balance for the various periods. This estimation indicates that significance levels are basically satisfactory in most of the periods. $ ^{8} $

##### A.2.4.2 Korea

The results of the reaction function analysis for Korea are shown in Table A2.4 through Table A2.11. Tables A2.4 to A2.7 are the analysis of the period of 1970 to 1980 when a fixed exchange rate system was adopted. Tables A2.8 and A2.9 show the results of the period of 1981 to 1990 which can be considered as a flexible exchange rate system. Tables A2.10 and A2.11 are the analysis of the period of 1970 to 1990.

Table A2.4 is the result of the period of 1970 to 1980 applying Probit method and Table A2.5 is the result of the maximum likelihood iterative method. From either estimation, the only significant result obtained was on the industrial production index in Table A2.5. In the Table A2.6, nothing was significant, and in Table A2.7, we could only see that coefficients on BP(-4) through BP(-8) show significant results in Table
A2.7 to which we have applied the maximum likelihood method.

Tables A2.8 and A2.9 show the period of 1981 and 1990 which we designated as flexible exchange rate system. In table A2.8, coefficients on real GDP growth rate and change of reserves are significant. On Table A2.9, coefficients on BP(-3) to BP(-8) are significant. From this result, we can interpret that the adjustment mechanism of the exchange rate increased in the flexible exchange rate period.

Tables A2.10 and A2.11 analyze the period through 1970 to 1990 by applying maximum likelihood method and show that most of the coefficients are at significant levels. The only insignificant level in Table A2.10 is the coefficient on growth of real exports, and in Table A2.11, coefficients on BP(-1) and BP(-2).

##### A.2.4.3 Indonesia

The results of reaction function of Indonesian are shown in Table A2.12 through Table A2.15. Table A2.12 and Table A2.13 show the results of estimation by the maximum likelihood iterative method. In Table A2.12, coefficients on DGDP83, which is the growth rate of real GDP in 1983 price, and DINPW, which is the inflation rate of the wholesale price, show significance. In Table A2.13, the estimations in the accumulated current accounts for the coefficients on BP(-1), BP(-2), BP(-3) and BP(-8) show significance of 5%. In Tables A2.14 and A2.15, we applied Probit method to the same period. The results in Table A2.14, coefficient of DINPW and DINRES shows significance and in Table A2.15, coefficient on BP(-1) show significance.

From these results, we can interpret that, in general, the exchange rate of Indonesia has been controlled taking into consideration economic growth, inflation and current account balance.

##### A.2.4.4 The Philippines

In the case of the Philippines, we applied both maximum likelihood method and Probit method. The results of maximum likelihood are shown in Tables A2.16 and A2.17. In Table A2.16, significant results were obtained in the coefficient on wholesale price inflation and consumer price inflation and other coefficients were not significant. Table A2.17 shows the results of the accumulated current accounts balance. In this exercise, none of the coefficients show significance. In Table A2.18, results of the Probit estimation show significance of the wholesale price inflation. When we look at the results of Table A2.19, results of the estimation become significant in the equations of BP(-7) and BP(-8).

Comparing the two estimations produced puzzling results. On the coefficient
of real GNP both estimations show insignificant results and enable us to convey that change of exchange rate was not focused on real growth. The coefficients on price indicator(s) consumer price and wholesale price index have the same tendencies. By the maximum likelihood method indicates positive sign and shows strong significance which can be interpreted that authorities tried to move the exchange rate to prevent overvaluation of the real exchange rate.

When we compared the results of the reaction function on the accumulated current account balance, we obtained insignificant results from maximum likelihood method although the results from the Probit method were significant with negative sign. The differing results of the two different methods raise certain questions, which stem from the fact that the movement of Philippines exchange rate is not exactly discrete to fit probit analysis but not exactly continuous to apply maximum likelihood of ordinary least square method.

#### A.2.5 Results of the reaction function analysis

Here we will summarize the results of the reaction function analysis to seek the target of the foreign exchange rate policy.

In the case of Japan which has adopted a flexible exchange rate policy with free capital movement, reaction function analysis is not an appropriate tool. In these countries, exchange rate is determined ex-post and this relationship between variables is the opposite to what we have assumed in the reaction function analysis. Despite these difficulties, to see the relationship between the variable is useful for comparison with other countries. In the reaction function analysis of Japan, export volume and accumulated current account balance influenced the determination of the exchange rate, but other variables do not have significant relationship.

In the analysis of Korea, we applied Probit estimation to the fixed exchange period. In this analysis, only the industrial production index was significantly related to the exchange rate determination. However, when we examined the impact of accumulated current accounts balance, the significance of the relationship when applying the Maximum Likelihood method in the flexible exchange period, but the results of the Probit analysis was relatively limited. In the 1980's, when the flexible exchange rate system was evidently applied, we found that the growth rate of real GNP, change in reserves and one part of the accumulated current account deficit were significant. When we applied the analysis for the whole estimation period, which is from 1970 to 1990, growth of real export volume and accumulated current accounts deficit achieved some significance. Looking at these results, we can interpret that
exchange rate of Korea was determined in response to the accumulated currents account balance. We also can interpret that the response to the economic activity weakened in the 1980's compared to the 1970's.

In the Indonesian case using the Maximum Likelihood method, the wholesale price inflation and accumulated current account balance were significant. By Probit estimation, wholesale price inflation, change in reserves and accumulated current accounts balance were significant.

In the Philippines, we estimated the entire period by both Maximum Likelihood and Probit method. According to both estimations, the exchange rate responded to wholesale price inflation and accumulated current account balance.

From all these results, we can generally conclude that the exchange rate responded to accumulated current account balance, while the responses to real economic activities, IIP or GDP growth were not significant.

An interesting result came from the analysis of the fixed exchange rate regime when we applied both Maximum Likelihood and Probit. In most cases, the Probit does not show significant results. The problems of applying the Probit method are the following. First, the dependant variable in this case is “1” in the case when the devaluation over 5% occurs, while in all other cases they are determined as “0”. The problem in this case is that however large the devaluation is, they are counted as “1” which seemed to bias the estimation. Second is that when the exchange rate has been devalued gradually below the rate of 5%, the accumulated effect cannot be captured. Third is that the number of “1”, means that the incidence of the significant devaluation are so very few that the result econometrically might not be significant. In this analysis, we took the whichever result is significant, but this offers an interesting issue for consideration.

#### A.2.6 Vector Auto-regression (VAR) analysis of the foreign exchange rate

The latter part of this study will examine the results of the fluctuations of exchange rate and causality between the variables by applying VAR model. The relationship between the exchange rate and current account is difficult to interpret. In the Japanese case, time series analysis of current account has been done in Chigira (1992), but the relationship between nominal exchange rate and the current account balance is not clearly interpreted. In the case of Korea, Indonesia and the Philippines, we have not seen any study applying VAR.

Following the methodology of the monetary policy in the previous studies, we will use the results of the variance decomposition to examine the relationships between
Table A2.1 Sign of the coefficients of the reaction function of the foreign exchange rate

Dependant Variable	Sign	Interpretation
Real GNP (GDP)	a>0	When the real economy starts to decline, monetary authorities try to devalue exchange rate to recover real growth.
IIP	a>0	When the real economy starts to decline, monetary authorities try to devalue exchange rate to recover industrial production.
CPI	a>0	When rate of inflation (consumer prices) goes up, authorities intend to devalue the exchange rate to keep the real exchange rate constant.
WPI	a>0	When rate of inflation (wholesale price) goes up, authorities intend to devalue the exchange rate to keep the real exchange rate constant.
RES	a<0	Authorities devalue exchange rate when the level of external reserves decreases.
EX	a<0	When volume of real exports decline, monetary authorities try to devalue exchange rate to recover export volume.
BP	a<0	Authorities devalue exchange rate when accumulated current account deficit increases or surplus declines.

Table A2.2 Japan Reaction Function on Exchange Rate (Flexible-ML)

C	DJGNP	DJPW	DJPC	DJIIP	DJEX	DJRES	R2	DW
0.594197E-02	-0.375968	0.444263E-02	1.96718
(-0.498272)	(-0.452054)
-0.014053	0.507572	0.046735	1.92871
(-1.74807)	(1.83504)
0.9674348E-02	-0.838016E-02	0.033401	1.96304
(-0.869228)	(-0.015903)
-0.650181E-02	-0.327150	0.012046	1.97590
(-0.70281)	(-0.866252)
-0.014591	0.292810	0.048067	1.96946
(-1.67529)	(1.85195)
-0.201986E-2	-0.201986E-2	0.251735	1.90326
(-0.271955)	(-4.83976)

Independent variable: Rate of change of nominal exchange from the previous period (Yen/$).

1) Variables DJGNP: Growth rate of GNP at 1985 Prices(billions of Yen)

DJPW: Inflation Rate (Wholesale Price Index 1985=100)

DJPC: Inflation Rate (Consumer Price Index 1985=100)

DJIIP: Growth Rate of Industrial Production Index (1985=100)

DJEX: Growth Rate of Export Volume Index (1985=100)

DJRES: Growth of International Reserves (excluding gold, millions of US$)

2) Period 73:2-90:4(Flexible exchange rate period-quarterly)

4) Estimated by Maximum Likelihood Iterative Technique (ML)

5) Figures in the parenthesis are t-value.
Table A2.3 Japan Reaction Function on Exchange Rate (Flexible-ML)

C	BP(-1)	BP(-2)	BP(-3)	BP(-4)	BP(-5)	BP(-6)	BP(-7)	BP(-8)	R2	DW
216.100	-0.105898E-02	0.264042	1.63419
(5.66579)	(-1.97322)
221.939	-0.968652E-03	0.293032	1.63990
(6.48982)	(-2.24199)
225.249	-0.744055E-03	0.313095	1.61723
(7.47321)	(-2.09201)
229.216	-0.700802E-03	0.322941	1.58895
(7.91174)	(-2.12359)
230.335	-0.569631E-03	0.334854	1.58541
(8.36031)	(-2.15846)
234.313	-0.554892E-03	0.367445	1.55585
(9.54203)	(-2.40439)
236.227	-0.504419E-03	0.386017	1.55603
(10.3877)	(-2.45361)
246.194	-0.60467E-03	0.475397	1.54468
(914.3701)	(-3.50170)

Independent variable: Nominal exchange rate (end of period Yen/$)

1) Variables BP(-x): Accumulated current account balance since previous x periods (millions US$)

2)Periods BP(-1): 70:2-90:4 (Flexible exchange rate-quarterly)

3) Estimated by Maximum Likelihood Iterative Technique

Table A2.4 Korea Reaction Function on Exchange Rate (Fixed-Probit)

C	DKGDP	DKPW	DKPC	DKIIP	DKEX	DKRES	R2
-1.39239	-6.49849	0.516647E-01
(-4.48540)	(-0.654774)
-1.81417	6.58760	0.249625E-01
(-3.96931)	(1.05383)
-1.91206	9.93815	0.253088E-01
(-3.22742)	(0.898110)
-0.937729	-21.4507	0.972990E-01
(-2.43739)	(-1.72793)
-1.58094	1.32691	0.297564E-01
(4.60362)	(0.621390)
-1.49165	0.125959E-02	0.982432E-02
(-4.88081)	(-0.999336)

Independent variable: 1: when there is a substantial devaluation 0: no substantial devaluation

1) Variables DKGDP: Growth rate of GDP at 1985 Prices (billions of Won)

DKPW: Inflation Rate (Wholesale Price Index 1985=100)

DKPC: Inflation Rate (Consumer Price Index 1985=100)

DKIIP: Growth Rate of Industrial Production Index (1985=100)

DKEX: Growth Rate of Export Volume Index (1985=100)

DKRES : Growth of International Reserves (excluding gold, millions of US$)

2)Period 70:2-80:4 (Fixed exchange rate period-quarterly)

3) Estimated by Probit Iteration
Table A2.5 Korea Reaction Function on Exchange Rate (Fixed-ML)

C	DKGDP	DKPW	DKPC	DKIIP	DKEX	DKRES	R2	DW
0.025194	-0.344732	0.047821	2.02288
(3.02066)	(-1.43272)
0.625676E-02	0.296232	0.54494	1.99917
(0.567280)	(1.53584)
-0.707819E-03	0.505483	0.069953	2.01570
(-0.53576)	(1.75345)
0.044205	-0.654122	0.168717	2.06274
(4.10646)	(-2.88127)
0.018036	0.01529	0.139437E-02	1.98500
(2.03610)	(0.239966)
0.20973	-0.346613E-04	0.038887	2.00381
(2.83985)	(-1.28587)

Independent variable: Rate of change of nominal exchange rate from the previous period.

1) Variables DKGDP: Growth rate of GDP at 1985 Prices (billions of Won)

DKPW: Inflation Rate (Wholesale Price Index 1985=100)

DKPC: Inflation Rate (Consumer Price Index 1985=100)

DKIIP: Growth Rate of Industrial Production Index (1985=100)

2)Period 70:2-80:4 (Fixed exchange rate period-quarterly)

3) Estimated by Maximum Likelihood Iterative Technique

Table A2.6 Korea Reaction Function on Exchange Rate (Fixed-Probit)

C	BP(-1)	BP(-2)	BP(-3)	BP(-4)	BP(-5)	BP(-6)	BP(-7)	BP(-8)	R2
-1.75239	-0.610259E-03	0.134021E-01
(-3.9996)	(-0.957056)
-1.70642	-0.281292E-03	0.868600E-02
(-3.90148)	(-0.830313)
-1.75489	-0.235174E-03	0.189512E-01
(-3.89918)	(-1.00591)
-1.700222	-0.162600E-03	0.164111E-03
(-3.81731)	(-0.866442)
-1.65647	-0.121536E-03	0.128426E-01
(-3.71986)	(-0.756397)
-2.02252	-0.164091E-03	0.179014E-01
(-3.57902)	(-1.03948)
-1.96310	-0.134013E-03	0.122794E-04
(-3.48112)	(-0.901722)
-1.90516	0.111061E-03	0.834062E-02
(-3.33549)	(0.755189)

Independent variable: 1: when there is a substantial devaluation 0: no substantial devaluation

1) Variables BP(-x): Accumulated current account balance since previous x periods (millions US$)

2) Periods BP(-1): 70:2-80:4 (Fixed exchange rate period-quarterly)

BP(-2): 70:3-80:4

BP(-3): 70:4-80:4

BP(-4): 71:1-80:4

BP(-5): 71:2-80:4

BP(-6): 71:3-80:4

BP(-7): 71:4-80:4

BP(-8): 72:1-80:4

3) Estimated by Probit Iteration
Table A2.7 Korea Reaction Function on Exchange Rate (Flexible-ML)
C	DKGDP	DKPW	DKPC	DKIIP	DKEX	DKRES	R2	DW
0.800001E-02	0.185579	0.119297	2.17958
(1.06747)	(-2.22492)
0.617595E-02	-0.107767	0.013141	2.13657
(0.922831)	(-0.566797)
0.012330	-0.452442	0.064903	2.15270
(1.52085)	(-1.67382)
0.643041E-02	-0.042736	0.014654	2.14129
(0.986953)	(-0.655012)
0.615789E-02	-0.029610	0.042020	2.11946
(0.952705)	(-1.30767)
0.615113E-02
(1.17764)	-0.490376E-05	0.086251	2.14340
(-1.98511)

Independent variable: Rate of change of nominal exchange from the previous period (Yen/\$).

1) Variables DKGDP: Growth rate of GDP at 1985 Prices (billions of Won)

DKPW: Inflation Rate (Wholesale Price Index 1985=100)

DKPC: Inflation Rate (Consumer Price Index 1985=100)

DKIIP: Growth Rate of Industrial Production Index (1985=100)

DKEX: Growth Rate of Export Volume Index (1985=100)

DKRES: Growth of International Reserves (excluding gold, millions of US$)

2)Period GDP: 81:1-90:4 Others: 81:1-92:2 (quarterly)

3) Estimated by Maximum Likelihood Iterative Technique

Table A2.8	Korea	Reaction Function on Exchange Rate (Fixed-ML)
C	BP(-1)	BP(-2)	BP(-3)	BP(-4)	BP(-5)	BP(-6)	BP(-7)	BP(-8)	R2	DW
470.704	-0.011485	0.071227	1.61996
(3.79596)	(-0.74087)
497.497	0.756110E-03	0.075733	1.60424
(4.07842)	(0.066053)
445.990	0.017577	0.136536	1.71746
(4.77363)	(-1.69713)
437.313	-0.18625	0.188595	1.97977
(5.69951)	(-2.03267)
443.580	-0.018529	0.362134	1.79586
(8.58470)	(-2.58149)
433.832	-0.018848	0.433088	1.91062
(10.1971)	(-3.08224)
424.662	-0.020125	0.505997	2.00473
(11.8630)	(-3.66869)
421.660	-0.021568	0.625663	1.98744
(15.4318)	(-4.44920)

Independent variable: Rate of change of nominal exchange from the previous period (Yen/$).

1) Variables BP(-x): Accumulated current account balance since previous x periods (millions US$).

2) Periods BP(-1): 70:2-80:4 (Fixed exchange rate period-quarterly)

BP(-2): 70:3-80:4

BP(-3): 70:4-80:4

BP(-4): 71:1-80:4

BP(-5): 71:2-80:4

BP(-6): 71:3-80:4

BP(-7): 71:4-80:4

BP(-8): 72:1-80:4

3) Estimated by Maximum Likelihood Iterative Technique