The impact of the budget deficit on inflation in the Philippines
Date
2003-04
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Abstract
Over the past two decades, the Philippines has experienced fiscal deficits that have been very large in proportion to the size of its economy by international standards. It is in this perspective that the present paper evaluates the country's experience with public sector deficit financing and its impact on consumer price level. In addition to analyzing the sensitivity of the budget deficit to inflation, this study also seeks to reveal their mutual impacts, and summarize the lessons from the past two decades (1981-2000). The Aghevli-Khan Model was employed in establishing the relationship of fiscal deficits and inflation. The regression results reveal the responsiveness of fiscal imbalance in affecting the level of inflation. Empirical estimates also show that as the Central Bank monetizes part of the government deficit, it runs a risk of raising consumer price level due to increased money supply.
Description
Keywords
Inflation, Budget deficit, Fiscal policy, Monetary policy, Macroeconomics