Philippine Standard time

Understanding the Phillips Curve and Cyclicality of Fiscal Policy

This CPBRD Note examines the prevailing dynamics between inflation and unemployment in the Philippines from 2011 to 2023, and provides the context on how it conforms to the contours set by the Phillips curve and natural rate of unemployment. This Note further emphasizes the role of fiscal policy through the lens of the Phillips curve in promoting fiscal discipline. In the context of fiscal interventions, the Phillips curve may serve as a guide to use the contractionary fiscal policy during economic booms to prevent overheating and excessive inflation, even if unemployment is low. In the context of monetary policy, the government needs to pursue sustainable levels of inflation and be cautious not to pursue overly expansionary fiscal policy. To avoid excessive spending and debt build-up, it is also important to consider having a rule-based framework or fiscal responsibility framework.


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