Business Fluctuations and Monetary Policy Rules in the Philippines: with Lessons from the 1984-1985 Contraction

Dante Canlas
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Dante Canlas: School of Economics, University of the Philippines Diliman

No 201210, UP School of Economics Discussion Papers from University of the Philippines School of Economics

Abstract: The paper reviews recent research on macroeconomic theory of business fluctuations and its influence on monetary policy rules. It focuses on triggers to business fluctuations and the mechanisms that propagate the fluctuations once started. The Philippines is used as empirical setting. The theory’s predictions are examined using time-series data on aggregate output performance, money growth, and budget deficits of government. The paper casts a spotlight on the output contraction of 1984-1985, the longest downturn in the postwar economic history of the Philippines. The role of monetary policy and fiscal policy shocks in triggering that downturn is studied, followed by the role of subsequent macroeconomic policy adjustments that propagated the downturn. The paper points out that monetary policy rules evolved in the aftermath of the 1984-1985 downturn, culminating in the inflation-targeting rule that the monetary authority currently uses. The adoption of inflation targeting hinged on the introduction of legislation that enabled the creation of a central bank with policy and instrument independence from the fiscal authority.

Pages: 20 pages
Date: 2012-06
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
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Published as UPSE Discussion Paper No. 2012-10, June 2012

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