Philippine E-Journals

An Empirical Verification of the Existence of Output, Inflation and Unemployment Trade-Offs in the Philippines 1975-1992

Roberto B. Raymundo

Discipline: Social Science

 

Abstract:

Sustained growth, maintaining stable prices and attaining a viable external accounts position are basic objectives which developing countries try to meet in order to put their economies on the road to recovery. Economic stabilization which can be achieved through the realization of these objectives will increase the prospects of attracting more domestic as well as foreign investment/ that may set the stage towards structural adjustment in the long run. Failure to meet the targets set for these objectives can spell the difference between an economy taking-off successfully towards the road to recovery, or an economy which performs in fits and spurts, in effect, experiencing accelerating growth in one period, then decelerating or maybe even negative growth in the next. The correct implementation of macroeconomic policies can facilitate the realization of these objectives, however, certain trade-offs between macro-targets must be expected due to some relationships which may exist between the macroeconomic variables involved. In particular, trade-offs between output growth and inflation have to be taken into account before any form of monetary or fiscal policy is to be implemented. Higher inflation may be accepted in exchange for relatively higher growth rates, or high growth may be compromised for the sake of eliminating the possibility of double digit inflation occurring. Along with this comes the unemployment issue. Is it acceptable to bear the burden of rising unemployment for the sake of maintaining stable prices, or reducing the unemployment rate at the expense of tolerating runaway inflation? These are dilemmas which policy-makers have to consider as the economy is fine-tuned to meet the objectives consistent with stabilization.