Foreign exchange market Essay Example for Free

Foreign ex commute grocery EssayMonetary indemnity is the process by which the monetary position of a country controls the give of specie, often bearinging a locate of by-line for the purpose of promoting economic taketh and constancy. The appointed goals ordinarily include relatively stable determines and low unemployment. Monetary theory provides insight into how to craft optimal pecuniary polity. It is referred to as either creation expansionary or contractionary, where an expansionary polity profits the total supply of money in the sparing more rapidly than usual, and contractionary indemnity extends the money supply more slowly than usual or even shrinks it. Expansionary insurance policy is tradition totallyy utilise to try to combat unemployment in a recession by do work downing take paces in the hope that easy reliance provide entice ancestryes into expanding. Contractionary policy is intended to slow splashiness in order to avoid the resulti ng distortions and deterioration of asset values.Monetary policy, to a great extent, is the perplexity of expectations. Monetary policy rests on the relationship between the steps of interest in an prudence, that is, the hurt at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of besidesls to control one or both of these, to sour outcomes like economic suppuration, puffiness, qualify rank with new(prenominal) currencies and unemployment. Where metal(prenominal) is under a monopoly of issuance, or where in that location is a regulated system of issuing bullion through banks which are tied to a telephone alternate bank, the pecuniary authority has the ability to alter the money supply and thus form the interest rate (to achieve policy goals). The beginning of pecuniary policy as such comes from the late 19th carbon, where it was used to maintain the gold quantity. GeneralMonetary policy is the process by which the presid ential term, central bank, or pecuniary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the frugality. Monetary theory provides insight into how to craft optimal monetary policy.Monetary policy rests on the relationship between the rates of interest in an rescue, that is the hurt at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals).It is important for policymake rs to make likely announcements. If private agents (consumers and firms) believe that policymakers are committed to debaseing inflation, they lead anticipate prospective prices to be lower than otherwise (how those expectations are formed is an entirely different matter compare for instance rational expectations with adaptive expectations). If an employee expects prices to be high up in the approaching, he or she lead draw up a wage contract with a high wage to match these prices. Hence, the expectation of lower wages is reflected in wage-setting bearing between employees and employers (lower wages since prices are expected to be lower) and since wages are in fact lower there is no demand pull inflation because employees are receiving a smaller wage and there is no cost push inflation because employers are paying out less in wages. 2. What is a primeval Bank?A central bank, adjudge bank, or monetary authority is an institution that manages a states currency, money supply, and interest rates. of import banks likewise unremarkably oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increase the hail of money in the country, and usually also prints the national currency, which usually serves as the nations legal tender. Examples include the European Central Bank (ECB) and the Federal Reserve of the joined States.The primary pop off of a central bank is to manage the nations moneysupply (monetary policy), through active duties such as managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during times of bank insolvency or financial crisis. Central banks usually also take invest supervisory powers, intended to prevent bank runs and to reduce the risk that commercial banks and other financial institutions engage in reckless or fraudulent behavior. Central banks in most developed nations are insti tutionally designed to be independent from political interference.THE BANGKO SENTRAL NG PILIPINASThe Bangko Sentral ng Pilipinas (English Central Bank of the Philippines Spanish Banco Central de Filipinas comm save abbreviated as BSP in both Filipino and English), is the central bank of the Philippines. It was established on July 3, 1993, pursuant to the provision of majority rule Act 7653 or the New Central Bank Act of 1993. HistoryIn 1900, the First Philippine Commission passed Act No. 52, which placed all banks under the side of the Treasury and authorizing the Insular Treasurer to supervise and examine banks and all banking application. In 1929, the Department of Finance, through the Bureau of Banking, took over bank supervision.By 1933, a mathematical group of Filipinos had conceptualized a central bank for the Philippine Islands. It came up with the rudiments of a bill for the establishment of a central bank after a calculated study of the economic render of the HareHaw esCutting Act, which would grant Philippine independence after 12 categorys, still reserving military and naval subalterns for the United States and imposing tariffs and quotas on Philippine exports. However, the HareHawesCutting Act would be rejected by the Senate of the Philippines at the urging of Manuel L. Quezon. This Senate then advocated a new bill that won President Franklin D. Roosevelts support this would be the TydingsMcDuffie Act, which would grant Philippine independence on July 4, 1946.During the Commonwealth Period, discussions continued regarding the idea ofa Philippine central bank that would get up price stability and economic growth. The countrys monetary system then was administered by the Department of Finance and the National Treasury, and the Philippine peso was on the exchange standard victimization the United States vaulting horse, which was backed by 100 percent gold reserve, as the standard currency.As required by the TydingsMcDuffie Act, the Nationa l Assembly of the Philippines in 1939 passed a law establishing a central bank. As it was a monetary law, it required the approval of the President of the United States Franklin D. Roosevelt did not give his. A snatch law was passed in 1944 under the Japanese-controlledSecond Republic, but the arrival of American liberation forces in 1945 aborted its implementation.Shortly after President Manuel Roxas assumed office in 1946, he instructed then-Finance Secretary Miguel Cuaderno, Sr. to draw up a charter for a central bank. The establishment of a monetary authority became imperative a year later as a result of the findings of the Joint Philippine-American Finance Commission chaired by Cuaderno. The Commission, which studied Philippine financial, monetary, and pecuniary problems in 1947, recommended a shift from the dollar exchange standard to a managed currency system. A central bank was necessary to implement the proposed shift to the new system.Roxas then created the Central Bank Council to fasten the charter of a proposed monetary authority. It was submitted to Congress in February 1948. By June of the same year, the newly proclaimed President Elpidio Quirino, who succeeded President Roxas, affixed his signature on Republic Act (RA) No. 265, the Central Bank Act of 1948.On January 3, 1949, the Central Bank of the Philippines was formally inaugurated with Miguel Cuaderno, Sr. as the first governor. The main duties and responsibilities of the Central Bank were to campaign economic development and maintain internal and external monetary stability. 3. What are the Types of Monetary Policy?In practice, to implement any part of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets (usually politicsobligations). These open grocery store operations change either the amount of money or its liquidity (if less liquid forms of money are bought or sold). The m ultiplier factor effect of fractional reserve banking amplifies the effects of these actions. Constant foodstuff transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate. The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals.Monetary PolicyTarget Market VariableLong Term Objective flash TargetingInterest rate on overnight debtA given rate of change in the CPIPrice Level TargetingInterest rate on overnight debtA specific CPI numberMonetary AggregatesThe growth in money supplyA given rate of change in the CPIFixed Exchange RateThe spot price of the currencyThe spot price of the currencyGold StandardThe spot price of goldLow inflation as measured by the gold priceMixed PolicyUsually interest ratesUsually unemployment + CPI changeThe different type s of policy are also called monetary regimes, in parallel to exchange rate regimes. A fixed exchange rate is also an exchange rate regime The Gold standard results in a relatively fixed regime towards thecurrency of other countries on the gold standard and a floating regime towards those that are not. Targeting inflation, the price level or other monetary aggregates implies floating exchange rate unless the management of the relevant foreign currencies is trailing exactly the same variables.In economics, an expansionary pecuniary policy includes higher expending and measure cuts, that encourage economic growth. In turn, an expansionary monetary policy is one that seeks to augment the size of the money supply. Conversely, contractionary monetary policy seeks to reduce the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry. In most nations, monetary policy is controlled by either a central bank or a finance minis try. Neoclassical and Keynesian economics significantly differ on the effects and effectiveness of monetary policy on influencing the real economy there is no clear consensus on how monetary policy implys real economic variables (aggregate output or income, employment). Both economic schools accept that monetary policy scratchs monetary variables (price levels, interest rates). Inflation targetingUnder this policy approach the target is to keep inflation, under a particular definition such as Consumer Price Index, at bottom a desired telescope. The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The interest rate used is by and large the interbank rate at which banks lend to each other overnight for property flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar. The interest rate target is maintained for a specific duration employ open market operations. Typi cally the duration that the interest rate target is kept constant will vary between months and years.This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee. Changes to the interest rate target are made in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target. For example, one simple method of inflation targeting called the Taylor rule adjusts the interest rate in response to changes in the inflation rate and the output gap.The rule was proposedby John B. Taylor of Stanford University. The inflation targeting approach to monetary policy approach was pioneered in New Zealand. It has been used inAustralia, Brazil, Canada, Chile, Colombia, the Czech Republic, Hungary, New Zealand, Norway, Iceland, India,Philippines, Poland, Sweden, South Africa, Turkey, and the United Kingdom. Price level targetingPrice level targeting is a moneta ry policy that is similar to inflation targeting except that CPI growth in one year over or under the long term price level target is offset in subsequent years such that a targeted price-level is reached over time, e.g. five years, giving more authenticty about future price increases to consumers. Under inflation targeting what happened in the immediate past years is not taken into account or adjusted for in the current and future years. Uncertainty in price levels can create uncertainty around price and wage setting activity for firms and workers, and undermines any information that can be gained from relative prices, as it is more difficult for firms to determine if a change in the price of a good or service is because of inflation or other factors, such as an increase in the efficiency of factors of production, if inflation is high and volatile. An increase in inflation also leads to a decrease in the demand for money, as it reduces the incentive to hold money and increases tra nsaction and shoe leather costs. Monetary aggregatesIn the 1980s, several countries used an approach based on a constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1 etc.). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman. This approach is also sometimes called monetarism. turn most monetary policy focuses on a price signal of one form or another, this approach is focused on monetary quantities. As these quantities could submit a role on the economy and occupation cycles depending on the households risk aversion level, money is sometimes explicitly added in the central banks reaction function. Fixed exchange rateThis policy is based on maintaining a fixed exchange rate with a foreign currency. There are varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation. Under a system of fiat fixed rates, the local judicature or monetary authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate.Instead, the rate is enforce by non-convertibility measures (e.g. capital controls, import/export licenses, etc.). In this case there is a black market exchange rate where the currency dutys at its market/unofficial rate. Under a system of fixed-convertibility, currency is bought and sold by the central bank or monetary authority on a daily basis to achieve the target exchange rate. This target rate whitethorn be a fixed level or a fixed bent deep down which the exchange rate may fluctuate until the monetary authority intervenes to buy or sell as necessary to maintain the exchange rate within the band. (In this case, the fixed exchange rate with a fixed level can be seen as a special case of the fixed exchange rate with bands where the bands are set to zero.) Under a system of fixed exchange rates maintained by a curren cy board any unit of local currency must be backed by a unit of foreign currency (correcting for the exchange rate).This ensures that the local monetary base does not inflate without being backed by hard currency and eliminates any worries about a run on the local currency by those wishing to convert the local currency to the hard (anchor) currency. Under dollarization, foreign currency (usually the US dollar, hence the term dollarization) is used freely as the intermediate of exchange either exclusively or in parallel with local currency. This outcome can come about because the local population has lost all faith in the local currency, or it may also be a policy of the government (usually to rein in inflation and import credible monetary policy). These policies often abdicate monetary policy to the foreign monetary authority or government as monetary policy in the pegging nation must align with monetary policy in the anchor nation to maintain the exchange rate. The degree to whic h local monetary policy becomes dependent on the anchor nation depends on factors such as capital mobility, openness, credit channels and other economic factors. Gold standardThe gold standard is a system under which the price of the national currencyis measured in units of gold bars and is kept constant by the governments promise to buy or sell gold at a fixed price in terms of the base currency. The gold standard might be regarded as a special case of fixed exchange rate policy, or as a special type of commodity price level targeting. Today this type of monetary policy is no longer used by any country, although the gold standard was widely used across the world between the mid-19th century through 1971. Its major advantages were simplicity and transparency. The gold standard was abandoned during the Great Depression, as countries sought to reinvigorate their economies by increasing their money supply.The Bretton Woods system, which was a modified gold standard, replaced it in the aftermath of World fight II. However, this system too broke down during the Nixon shock of 1971. The gold standard induces deflation, as the economy usually grows faster than the supply of gold. When an economy grows faster than its money supply, the same amount of money is used to execute a larger number of transactions. The single way to make this possible is to lower the nominal cost of each transaction, which means that prices of goods and services fall, and each unit of money increases in value. Absent preventative measures, deflation would tend to increase the ratio of the real value of nominal debts to physical assets over time. For example, during deflation, nominal debt and the monthly nominal cost of a fixed-rate home mortgage stays the same, even while the dollar value of the house falls, and the value of the dollars required to pay the mortgage goes up.Economists generally consider such deflation to be a major disadvantage of the gold standard. Unsustainable (i.e. exc essive) deflation can cause problems during recessions and crisis lengthening the amount of time an economy spends in recession. William Jennings Bryan rose to national prominence when he create his historic (though unsuccessful) 1896 presidential campaign around the argument that deflation caused by the gold standard made it harder for everyday citizens to start new businesses, expand their farms, or set up new homes. 4. What are the Monetary Policy tools?Monetary policy uses three main tactical approaches to maintain monetary stability The first tactic manages the money supply.This mainly involves buying government bonds (expanding the money supply) orselling them (contracting the money supply). In the Federal Reserve System, these are known as open market operations, because the central bank buys and sells government bonds in public markets. Most of the government bonds bought and sold through open market operations are short-term government bondsbought and sold from Federal Re serve System member banks and from large financial institutions. When the central bank disburses or collects payment for these bonds, it alters the amount of money in the economy while simultaneously affecting the price (and thereby the yield) of short-term government bonds. The change in the amount of money in the economy in turn affects interbank interest rates. The second tactic manages money demand.Demand for money, like demand for most things, is sensitive to price. For money, the price is the interest rates charged to borrowers. Setting banking-system bring or interest rates (such as the US overnight bank lending rate, the federal funds discount Rate, and the London Interbank Offer Rate, or Libor) in order to manage money demand is a major tool used by central banks. Ordinarily, a central bank conducts monetary policy by training or lowering its interest rate target for the interbank interest rate. If the nominal interest rate is at or very dear zero, the central bank canno t lower it further. Such a situation, called a liquidity trap, can occur, for example, during deflation or when inflation is very low. The third tactic involves managing risk within the banking system.Banking systems use fractional reserve banking to encourage the use of money for investment and expanding economic activity. Banks must keep banking reserves on hand to handle effective cash inevitably, but they can lend an amount equal to several times their actual reserves. The money lent out by banks increases the money supply, and too much money (whether lent or printed) will lead to inflation. Central banks manage systemic risks by maintaining a balance between expansionary economic activity through bank lending and control of inflation through reserve requirements.5. What is Fiscal Policy?Fiscal policy is a type of economical hindrance where the government injects its policies into an economy in order to either expand the economysgrowth or to contract it. By changing the level s of expenditure and levyation, a government can contributely or indirectly affect the aggregate demand, which is the total amount of goods and services in an economy.One thing to remember concerning fiscal policy is that a recession is generally defined as a time period of at least two quarters of consecutive decrement in growth. It may take time to even recognize whether or not there is a recession. With fiscal policy, there will be certain levels of lag time in which conditions will deteriorate before being recognized. At the same time, fiscal policy takes time to implement over receivable to legislative and administrative processes, and those same policies will take time to show results after implementation.Consumers can also react to these policies positively or negatively. Most consumers would have a positive reaction per say to a policy that lowers taxes, while some will have an issue with a government expending more which will increase the burden of debt on nations cit izens. Nevertheless, fiscal policy is a type of intervention that can help to control the direction of an economy. Deciding if and when it should be used will certainly continue to be debated.In economics and political science, fiscal policy is the use of government revenue collection (taxation) and expenditure (spending) to influence the economy. The two main instruments of fiscal policy are changes in the level and composition of taxation and government spending in various sectors. These changes can affect the following macroeconomic variables in an economy Aggregate demand and the level of economic activityThe dissemination of incomeThe pattern of resource allocation within the sector and relative to the private sector. Fiscal policy refers to the use of the government budget to influence economic activity.6. What are the Types of Fiscal Policy?Expansionary Fiscal PolicyWhen an economy is in a recession, expansionary fiscal policy is in order. Typically this type of fiscal poli cy results in increased government spending and/or lower taxes. A recession results in a recessionary gap meaning that aggregate demand (ie, GDP) is at a level lower than it would be in a full employment situation. In order to close this gap, a government will typically increase their spending which will directly increase the aggregate demand curve (since government spending creates demand for goods and services). At the same time, the government may choose to cut taxes, which will indirectly affect the aggregate demand curve by allowing for consumers to have more money at their disposal to consume and invest. The actions of this expansionary fiscal policy would result in a shift of the aggregate demand curve to the right, which would result closing the recessionary gap and helping an economy grow. Contractionary Fiscal PolicyContractionary fiscal policy is fundamentally the opposite of expansionary fiscal policy. When an economy is in a state where growth is at a rate that is gett ing out of control (causing inflation and asset bubbles), contractionary fiscal policy can be used to rein it in to a more sustainable level. If an economy is growing too fast or for example, if unemployment is too low, an inflationary gap will form. In order to eliminate this inflationary gap a government may reduce government spending and increase taxes. A decrease in spending by the government will directly decrease aggregate demand curve by diminution government demand for goods and services. Increases in tax levels will also slow growth, as consumers will have less money to consume and invest, thereby indirectly reducing the aggregate demand curve. ConsiderationsEconomic fluctuations independent of policy actions by government often affect the level of tax revenues, forcing elected officials to alter fiscal policy. For example, economic recessions reduce output and employment, resulting in trim back revenue for government coffers. This often forces policy makers to consider c ontractionary measures, such as increasing revenues by raising taxes or cutting government spending.7. What are the Components/Instruments of Fiscal Policy?TaxationTaxation is one of the two primary instruments of fiscal policy. When the government increases or decreases taxes, it increases or decreases the amount of money consumers have to spend which can have a significant impact on the direction of the general economy. A decrease in taxation tends to put more money into the hands of consumers, which can lead to increased spending. Increased spending tends to lead to higher revenues for businesses, which can allow them to expand and hire more workers. Cutting taxes is a common fiscal policy measure to encourage economic growth. Government SpendingGovernment spending is the other main instrument of fiscal policy. The expenditures of the government can get up economic activity and create jobs. For example, if the government funds a project to build a high-speed train across the co untry, the funds that go into the project could go toward hiring workers which could reduce unemployment and inject money into the economy. Higher levels of government spending tend to promote employment and economic growth.ConsiderationsThe government uses fiscal policy to promote economic growth, low unemployment and to stabilize the economy. During period of low economic growth, the government tends to cut taxes and may increase spending in an attempt to spark growth. During periods of high economic growth, the government may increase taxes and cut spending to ensure that the economy doesnt grow too quickly which can result in undesirable effects like high inflation. 8. What are the Stances of Fiscal Policy?The three main stances of fiscal policy areNeutral fiscal policy is usually undertaken when an economy is in equilibrium. Government spending is fully funded by tax revenue and overall the budget outcome has a neutral effect on the level of economic activity. Expansionary fisc al policy involves government spending exceeding tax revenue, and is usually undertaken during recessions. Contractionary fiscal policy occurs when government spending is lower than tax revenue, and isusually undertaken to pay down government debt.However, these definitions can be misleading because, even with no changes in spending or tax laws at all, cyclic fluctuations of the economy cause cyclic fluctuations of tax revenues and of some types of government spending, altering the deficit situation these are not considered to be policy changes. Therefore, for purposes of the above definitions, government spending and tax revenue are normally replaced by circularly adjusted government spending and cyclically adjusted tax revenue. Thus, for example, a government budget that is balanced over the course of the business cycle is considered to represent a neutral fiscal policy stance. 1. Methods of fundingGovernments spend money on a wide variety of things, from the military and police to services like education and healthcare, as well as transfer payments such as welfare benefits. This expenditure can be funded in a number of different ways TaxationSeignior age, the benefit from printing moneyBorrowing money from the population or from abroadConsumption of fiscal reservesSale of fixed assets (e.g., land)2. BorrowingA fiscal deficit is often funded by issuing bonds, like treasury bills or consols and gilt-edged securities. These pay interest, either for a fixed period or indefinitely. If the interest and capital requirements are too large, a nation may default on its debts, usually to foreign creditors. Public debt or adoption refers to the government borrowing from the public. 3. Consuming prior surplusesA fiscal surplus is often saved for future use, and may be invested in either local currency or any financial instrument that may be traded later once resources are needed notice, additional debt is not needed. For this to happen, the marginal propensity to sav e needs to be strictly positive. Economic effects of fiscal policyGovernments use fiscal policy to influence the level of aggregate demand in the economy, in an effort to achieve economic objectives of price stability, full employment, and economic growth. Keynesian economics suggests that increasing government spending and decreasing tax rates are the best ways to stimulate aggregate demand, and decreasing spending increasing taxes after the economic boom begins. Keynesians argue this method be used in times of recession or low economic activity as an essential tool for building the framework for strong economic growth and functional towards full employment. In theory, the resulting deficits would be paid for by an expanded economy during the boom that would follow this was the reasoning behind the New Deal.Governments can use a budget surplus to do two things to slow the pace of strong economic growth, and to stabilize prices when inflation is too high. Keynesian theory posits t hat removing spending from the economy will reduce levels of aggregate demand and contract the economy, thus stabilizing prices.But economists still debate the effectiveness of fiscal stimulus. The argument mostly centers on crowding out whether government borrowing leads to higher interest rates that may offset the simulative impact of spending. When the government runs a budget deficit, funds will need to come from public borrowing (the issue of government bonds), overseas borrowing, or monetizing the debt. When governments fund a deficit with the issuing of government bonds, interest rates can increase across the market, because government borrowing creates higher demand for credit in the financial markets. This causes a lower aggregate demand for goods and services, distant to the objective of a fiscal stimulus. Neoclassical economists generally emphasize crowding out while Keynesians argue that fiscal policy can still be effective especially in a liquidity trap where, they arg ue, crowding out is minimal. 9. What are the Functions of Fiscal Policy?AllocationThe first major function of fiscal policy is to determine exactly how funds will be divvy upd. This is closely related to the issues of taxation andspending, because the allocation of funds depends upon the collection of taxes and the government using that revenue for specific purposes. The national budget determines how funds are allocated. This means that a specific amount of funds is set aside for purposes specifically set(p) out by the government. This has a direct economic impact on the country. DistributionWhereas allocation determines how much will be set aside and for what purpose, the distribution function of fiscal policy is to determine more specifically how those funds will be distributed throughout each segment of the economy. For instance, the government might allocate $1 one million million toward social welfare programs, but $100 million could be distributed to food stamp programs, wh ile another $250 million is distributed among low-cost lodgment authority agencies. Distribution provides the specific explanation of what allocation was intended for in the first place. StabilizationStabilization is another important function of fiscal policy in that the purpose of budgeting is to provide stable economic growth. Without some restraints on spending, the economic growth of the nation could become unstable, resulting in periods of unrestrained growth and contraction. While many might frown upon governmental restraint of growth, the stock market crash of 1929 made it clear that unfettered growth could have serious consequences. The cyclical nature of the market means that unrestrained growth cannot continue for an indefinite period. When growth periods end, they are followed by contraction in the form of recessions or extended recessions known as depressions. Fiscal policy is designed to anticipate and mitigate the effects of such economic lulls.DevelopmentThe fourth major function of fiscal policy is that of development. Development seems to indicate economic growth, and that is, in fact, its overall purpose. However, fiscal policy is far more complicated than determining how much the government will tax citizens one year and then determining how that money will be spent. True economic growth occurs when various projects are financed and carried out using borrowed funds. Thisstems from the the belief that the private sector cannot grow the economy by itself. Instead, some government input and influence are needed. Borrowing funds for this economic growth is one way in which the government brings about development. This economic model developed by John Maynard Keynes has been adopted in various forms since the World War II era.10. What is the Fiscal Policy in the Philippines?Fiscal policy refers to the measures employed by governments to stabilize the economy, specifically by manipulating the levels and allocations of taxes and government expen ditures. Fiscal measures are oftentimes used in tandem with monetary policy to achieve certain goals. In the Philippines, this is characterized by continuous and increasing levels of debt and budget deficits, though there have been improvements in the last few years.The Philippine governments main sources of revenue are taxes, with some non-tax revenue also being collected. To finance fiscal deficit and debt, the Philippines rely on both domestic and external sources.Fiscal policy during the Marcos ecesis was primarily focused on indirect tax collection and on government spending on economic services and infrastructure development. The administration inherited a large fiscal deficit from the previous administration, but managed to reduce fiscal imbalance and improve tax collection through the introduction of the 1986 Tax Reform Program and the value added tax. The Ramos experienced budget surpluses due to substantial gains from the massive sale of government assets and strong fore ign investment in its early years. However, the implementation of the 1997 Comprehensive Tax Reform Program and the outpouring of the Asiatic financial crisis resulted to a deteriorating fiscal position in the succeeding years and administrations. The Estrada administration faced a large fiscal deficit due to the decrease in tax effort and the repayment of the Ramos administrations debt to contractors and suppliers. During the Arroyo administration, the Expanded Value Added Tax Law was enacted, national debt-to-GDP ratio peaked, and under spending on public infrastructure and other capital expenditures was observed. History of Philippine Fiscal PolicyMarcos Administration (1981-1985)The tax system under the Marcos administration was generally regressive as it was heavily dependent on indirect. Indirect taxes and international trade taxes accounted for about 35% of total tax revenue, while direct taxes only accounted for 25%. Government expenditure for economic services peaked dur ing this period, focusing mainly on infrastructure development, with about 33% of the budget spent on capital outlays. In response to the higher global interest rates and to the depreciation of the peso, the government became increasingly reliant on domestic financing to finance fiscal deficit. The government also started liberalizing tariff policy during this period by enacting the initial Tariff Reform Program, which narrowed the tariff structure from a range of 100%-0% to 50%-10%, and the Import Liberalization Program, which aimed at reducing or eliminating tariffs and realigning indirect taxes. Aquino Administration (1986-1992)Faced with problems inherited from the previous administration, the most important of which being the large fiscal deficit heightened by the low tax effort due to a weak tax system, Aquino enacted the 1986 Tax Reform Program (TRP). The aim of the TRP was to simplify the tax system, make revenues more responsive to economic activity, promote horizontal equi ty and promote growth by correcting existing taxes that impaired business incentives. One of the major reforms enacted under the program was the introduction of the Value Added Tax (VAT), which was set at 10%. The 1986 tax reform program resulted in reduced fiscal imbalance and higher tax effort in the succeeding years, peaking in 1997, before the enactment of the 1997 Comprehensive Tax Reform Program (CTRP). The conduct of non-tax revenues during this period soared due to the sale of sequestered assets of President Marcos and his cronies (totalling to about 20 billion), the initial efforts to deregulate the oil industry and thrust towards the privatization of state enterprises. Public debt service and interest payments as a percent of the budget peaked during this period as government focused on making up for the debt incurred by the Marcos administration. another(prenominal) important reform enacted during the Aquino administration was the passage of the 1991 Local Government Co de which enabled fiscal decentralization. This increased thetaxing and spending powers to local governments in effect increasing local government resources. Ramos Administration (1993-1998)The Ramos administration had budget surpluses for four of its six years in power. The government benefited from the massive sale of government assets (totalling to about 70 billion, the biggest among the administrations) and continued to benefit from the 1986 TRP. The administration invested heavily on the power sector as the country was beset by power outages. The government utilized its essential powers to fast-track the construction of power projects and established contracts with independent power plants. This period also experienced a real estate boom and strong foreign direct investment to the country during the early years of the administration, in effect overvaluing the peso. However, with the onset of the Asian financial crisis, the peso depreciated by almost 40%. The Ramos administratio n relied heavily on external borrowing to finance its fiscal deficit but quickly switched to domestic dependence on the onset of the Asian financial crisis. The administration has been accused of resorting to budget trickery during the crisis balancing assets through the sales of assets, building up accounts payable and delaying payment of government premium to social security holders. In 1997, the Comprehensive Tax Reform Program (CTRP) was enacted. Republic Act (RA) 8184 and RA 8240, which were implemented under the program, were estimated to yield additional taxes of around 7.4 billion however, a tumble in tax effort during the succeeding periods was observed after the CTRP was implemented. This was attributed to the unfavorable economic climate created by the Asian fiscal crisis and the poor implementation of the provisions of the reform. A sharp decrease in international trade tax contribution to GDP was also observed as a consequence of the trade liberalization and globalizat ion efforts in the 1990s, more prominently, the establishment of the ASEAN Free Trade Agreement (AFTA) and membership to the World Trade Organization (WTO) and the Asia-Pacific Economic Cooperation (APEC). The Ramos administration also provided additional incentives to export-oriented firms, the most prominent among these being RA 7227 which was instrumental to the success of the Subic Bay Freeport Zone. Estrada Administration (1999-2000)President Estrada, who assumed office at the height of the Asian financial crisis, faced a large fiscal deficit, which was mainly attributed to the sharp deterioration in the tax effort (as a result of the 1997 CTRP increased tax incentives, narrowing of VAT base and lowering of tariff walls) and higher interest payments given the sharp depreciation of the peso during the crisis. The administration also had to pay P60 billion worth of accounts payables left unpaid by the Ramos administration to contractors and suppliers. Public spending focused on s ocial services, with spending on basic education ambit its peak. To finance the fiscal deficit, Estrada created a balance between domestic and foreign borrowing. Arroyo Administration (2002-2009)The Arroyo administrations poor fiscal position was attributed to weakening tax effort (still resulting from the 1997 CTRP) and rising debt servicing costs (due to peso depreciation). Large fiscal deficits and heavy losses for monitored government corporations were observed during this period. National debt-to-GDP ratio reached an all-time high during the Arroyo administration, averaging at 69.2%. Investment in public infrastructure (at only 1.9% of GDP), expenditure for economic services, health spending and education spending all hit an historic-low during the Arroyo administration. The government responded to its poor fiscal position by under-spending in public infrastructure and social overhead capital (education and health care), thus sacrificing the economys long-run growth. In 2005, RA 9337 was enacted, the most significant amendments of which were the removal of electricity and petroleum VAT exemptions and the increase in the VAT rate from 10% to 12%.