The paper aims to quantify the macroeconomic impact of the monetary and fiscal measures that the Philippines implemented in response to the COVID-19 pandemic. It looks at how these initiatives helped mitigate a deeper economic fallout and the permanent scarring of the domestic economy. The paper also investigates the issues of fiscal dominance and loss of central bank independence which are important concerns raised in the context of the monetary and fiscal policy responses to the COVID-19 crisis.
Empirical results show that an increase in fiscal spending in the previous period constrains GDP growth. Moreover, the COVID-19 pandemic was found to have a significantly large negative effect on the country’s real GDP growth. The net impact of the COVID-19 pandemic and fiscal spending on production and output appear to be negative. This indicates the difficult task of fiscal policy in offsetting the large negative effects of COVID- 19 on the economy. Estimates of the fiscal multiplier show that it declined during the COVID-19 pandemic (2020-2021) indicating the minimal fiscal effects experienced during the pandemic. The lower fiscal multiplier contributed to the large drop in real GDP growth.
On the issue of fiscal dominance and loss of central bank independence, empirical results imply that decisions on debt management in the Philippines are influenced by both fiscal and monetary policy. Although there seems to be no indication of any dominance in the conduct of macroeconomic policy in favor of either fiscal policy or monetary policy indicators, decisions on debt maturity as well as the inflation rate are both highly sensitive to the evolution of the debt to GDP. This has a direct implication on the issue of debt sustainability.