​Governance and Cycl​icality of Philippine Fiscal Policy

John Michael Rennie Hallig, Nickson Cabote and Pamela Patacsil
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John Michael Rennie Hallig: Bangko Sentral ng Pilipinas
Nickson Cabote: Bangko Sentral ng Pilipinas
Pamela Patacsil: Bangko Sentral ng Pilipinas

No 202607, BSP Discussion Paper Series from Bangko Sentral ng Pilipinas

Abstract: This study examines whether Philippine fiscal policy is countercyclical and how the quality of institutions is associated with this policy’s response to economic cycles. The study analyzes fiscal reaction functions for balances, revenues, and spending, and uses local projections to examine how fiscal policy responds to changes in gross domestic product (GDP) forecasts. The results highlight two main findings. First, both the overall balance and government spending respond countercyclically to the output gap at both quarterly and annual intervals. Local projections also confirm that fiscal policy adjusts in a countercyclical manner following positive adjustments to GDP forecasts. Second, administrative capacity (government effectiveness) and accountability (voice and accountability) condition the cyclical response in opposite directions, suggesting that a broad governance index could mask these patterns. This breakdown is broadly consistent with governance measures constructed outside the Worldwide Governance Indicators (WGI), but because these indicators are available only annually, the study treats the results as associations rather than proof of causality. The static interaction results are strongest under the Hodrick-Prescott cycle definitions and the full-control specification. Overall, the results suggest that the Philippines has made progress toward countercyclical fiscal policy, but the transition is not yet complete. Most countercyclical changes appear in the overall balance and spending, while the cyclically adjusted primary balance (CAPB) shows that discretionary policy still has some procyclical aspects.

JEL-codes: C22 E32 E62 H62 O23 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2026-07
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Published as BSP Discussion paper No. 2026-07, October 2026

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Persistent link: https://EconPapers.repec.org/RePEc:bhd:dpaper:202607

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