Economic Debate: Role of Fiscal Constraints and Monetary Policy in Philippine Economic Recovery

Running head: ECONOMIC DEBATE 1
Economic Debate
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ECONOMIC DEBATE 2
Introduction
Economic recovery can be defined as a flow of improved business cycle signifying the
end of a recession, a period which an economy regains as well as exceeds output levels and peak
employment achieved before the downturn. This period is not usually easy to recognize unless it
has lasted for some months. In Philippines economists have been reported to apply number of
indicators to determine whether the economic recovery is in progress (VENZON 2017). These
include gross domestic product, financial markets, inflation as well as unemployment. The
economy contracts and grows in continuously changing periods as it strives to find the point of
equilibrium (STEINDL 2009). The common features of economic expansion and recover include
gross domestic product growth, declining unemployment, and higher consumer confidence and
stock market gains. The economic cycle consists of phases which are trough, contraction, peak as
well as expansion. Economic recovery is experienced during the contractionary phase (LAYTON
2018). Monetary policy on the other side involves a process of announcing, drafting as well as
implementing the plan associated with actions adopted by the currency board, the central bank or
any other capable regulator body within a country that usually determines the impact and scope
of the major drivers of the country’s economy. Activities that are crucial to monetary policy
comprises of management of interest rates and money supply (LAYTON 2018).
The role of fiscal constraints in recovery and monetary policy in Philippine
Fiscal constraints refer to a demonstration of adequate funds for implementing the
proposed improvements in the transportation systems as well as to maintain and operated the
whole system, by comparing the revenues and costs. Any policy that is changed strongly affect
every person in a country. In Philippines, the existing interaction between fiscal policy as well as
monetary policy involves the fact that these two have a great effect on the major macroeconomic

ECONOMIC DEBATE 3
activities. As a result, this develops interdependence in pursuing policy objectives (MISHKIN,
2007). Fiscal policy in Philippines largely influences risk premia, real interest rate, potential
output, and aggregate demand. Monetary policy in Philippines on the other side greatly impacts
inflations expectations, risk premia as well as interest rates (ADAMS & COLANDER 2010).
According to various economic studies conducted in Philippines, they are three main ways that
monetary policy can greatly affect fiscal policy (VENZON 2017). Fiscal policy has a huge
impact on prices and economic growth through fiscal policy stabilization. The second impact
involves the operation associated with automatic fiscal stabilizers which can largely lead to a
reduction in the short-term volatility (MISHKIN, 2007). The third impact lies on the fact that the
cost associated with a debt of financing the government. In any given ideal situation, fiscal
policy greatly contributes to the maintenance of the macroeconomic stability. The monetary
policy is supposed to monitor the fiscal policy frequently. In pursuits of the country’s objective,
the central bank is involved into taking account the fiscal policy. Instruments and objectives
must be assigned effectively (ADAMS & COLANDER 2010).