Macroeconomic Fundamentals

To understand something, one has to study its fundamentals. That is why in order for us to understand macroeconomics, we have to study the rudiments which are essential parts of it. Macroeconomic Fundamentals are the two tools that the government uses to influence the economy. And these are Monetary and Fiscal Policies.

The government makes use of these Monetary and Fiscal Policies to address the 3 Macroeconomic Concerns of inflation, unemployment, and output growth. Therefore, the policies that the government formulates are influenced by interest rates, taxes, government spending, etc.

Let us go over each policy:

1.  Monetary Policy

Using its monetary authority to control the supply and availability of money, the government attempts to influence the overall level of economic activity in line with its political objectives. Usually this goal is "macroeconomic stability" - low unemployment, low inflation, economic growth, and a balance of external payments. Monetary policy in the Philippines is administered by the Banko Sentral ng Pilipinas (BSP).

If the BSP believes that money supply is in excess of a desired level, then it can take action to reduce the money supply. This is referred to as contractionary monetary policy. On the other hand, if—based on the BSP’s assessment—the liquidity situation is tight and there is a need to increase money supply, it implements an expansionary monetary policy.

The BSP’s approach to Monetary Policy is through INFLATION TARGETING.

Under inflation targeting, the BSP publicly announces a target for inflation and promises to achieve this over a specified time period. The central bank then compares actual headline inflation against its inflation forecasts. The BSP uses the various monetary policy instruments at its disposal to achieve the inflation target. In the case of the Philippines, this involves mainly adjustments in the key policy interest rates of the BSP.

2. Fiscal Policy

This refers to the measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expenditures. Fiscal Policy in the Philippines is characterized by continuous and increasing levels of debt and budget deficits, though there have been improvements in the last few years.

The Department of Finance (DOF) is mandated to formulate and administer fiscal policies in coordination with other concerned subdivisions, agencies and instrumentalities of the government. Two of the 11 government bodies under theDOF are the Bureau of Internal Revenue (BIR) which is in charge of collecting taxes and the Bureau of Treasury (BTr) which is in charge of managing the government's finances by maximizing revenues collected and minimizing spending.

Contractionary fiscal policy involves either an increase on tax rates or decrease in government spending. The increase in taxes provides the household sector with less disposable income that can be used for consumption expenditures, which then reduces aggregate production and employment and leads to further decreases in income, thus reducing inflationary pressure. 

Expansionary fiscal policy is the opposite of contractionary fiscal policy. It consists of increasing government spending, decreasing taxes, and increasing transfer payments. The resulting increase in the aggregate expenditures causes an increase in aggregate production and thus reduces unemployment.

Fiscal measures are frequently used in tandem with monetary policy to achieve macroeconomic stability.