Monetary, fiscal and exchange rate policies and Philippine output: an application of IS-MP-AS model

Abstract

Extending Romer’s model and applying Engle’s ARCH/GARCH process, the study finds that real GDP in the Philippines is negatively influenced by the expected inflation rate and the US federal funds rate, and positively affected by the government deficit/ GDP ratio, the domestic debt/GDP ratio, real peso depreciation, and stock market performance. Hence, more government deficit spending and debt as percent of GDP can be used to stimulate a weak economy. Although peso depreciation would help raise output, currency depreciation may have other negative effects such as the outflow of international investors, and currency substitution that may cause exchange rate instability.

JEL classification: E5, E6, F4