University of Perpetual Help System LAGUNA

Monetary and Fiscal Policy

JOURNAL REVIEW 2

Macroeconomic Effects of Fiscal

Policies: Empirical Evidence from Bangladesh,
People’s Republic of China, Indonesia,
and Philippines

SUBMITTED TO:

DR. ALLAN AMPARO

FACULTY GRADUATE SCHOOL

SUBMITTED BY:

JULIUS B. MESINA
Part I. Summary:

This paper studies macroeconomic effects of fiscal policies in four Asian countries—

Bangladesh, People’s Republic of China, Indonesia, and Philippines—by means of structural

macro-econometric model simulations. It is found that short-term fiscal multipliers from an

untargeted increase in government expenditure are positive but much less than those from an

increased expenditure targeted to capital spending. The multiplier effects from fiscal expansion

via a tax rate reduction are found to be typically much less than through higher spending.

The effectiveness of automatic stabilizers in general, and more specifically, the effectiveness of

expenditure versus tax-side stabilizers, differs across countries.

Part II. Reflection:

The paper examines the fiscal policy for the said four Asian countries – Bangladesh,

PRC, Indonesia and The Philippines. Fiscal policy was divided in two: Discretionary Policy – in

which the effectiveness is evaluated on the basis of the sizes of the short-term and medium-

term multipliers under three scenarios: 1) Untargeted Government spending increase – found to

be positive but way below unity for each of the four countries,; 2) Investment targeted

government spending increase; 3) Tax reduction - The multipliers from a tax reduction are

generally lower than the spending multipliers except in the case of the PRC against untargeted

spending. Over the medium term, the multiplier impact of a fiscal impulse shock dies out, except in the

targeted spending scenario for the PRC and the Philippines. And Automatic. Stabilizers: classified into

two types: One that works on the expenditures side and the other through the tax side at least for

PRC, Indonesia, and Philippines, automatic stabilizers are effective in smoothing out some of the effects

of a large demand shock. At least for PRC, Indonesia, and Philippines, automatic stabilizers are effective

in smoothing out some of the effects of a large demand shock. The results also indicate that an

expenditure-side automatic stabilizer is more effective for the PRC and the Philippines, while a

tax-side stabilizer is more effective for Indonesia.

Part III. Application

Due to crowding out effects, most of these studies find that the monetary multipliers are

positive but small in the short term and drop to zero in the long run. Having eight factors -

income and consumption, labour and employment, investment, government, foreign trade, the three

sectors of GDP, price and wage, and monetary blocks. Directly impact the economy. If people are

employed will have good steady income and they can purchase their needs, in return would help improve

the lives of the other industries in a country; High labour and employment is a good indicator of

opportunities within a country leading to improve economic status of the people like one good indicator

for a sound economy is the emergence of the Middle-income families; Investment – If the economy of a

certain country is in sound status, it is projecting to have a stable economy that foreign investments may

be attracted; Government’s fiscal policy plays a great role in making its own economy stable; Doing

foreign trade is a sure way to have vibrant economy and able to produce goods and services beneficial to

the people; A good balance of price vs. wages or in my understanding inflation, the money people earned

(wages) in relations to their purchasing power would be beneficial if the government is able to employ

balance of aggregate supply and demand; monetary blocks that would respond the current state of an

economy may it be expansionary or contractionary.