Lawrence B. Dacuycuy
Year: 2019 January, Volume 28 No. 2
Using a calibrated dynamic model that embeds endogenous fiscal policy tools, this note provides simulation evidence on the effectiveness of tax and fiscal spending policies in determining key macroeconomic outcomes. The model was chosen because newly imposed taxes in the Philippines have affected the prices of consumption varieties and plausibly because of deep habits, the pricing policies of firms have become dynamic. Building upon the seminal model of Ravn, Schmitt-Grohe, and Uribe (2006), this note shows that preference structures do have a key role to play in determining the response of private consumption to endogenous fiscal policy. Results show that lowering labor earnings taxes stimulates the economy through a higher level of output and private consumption. Mark-ups remain countercyclical, replicating a key result associated with an increase in fiscal spending. In contrast, a 1% increase in consumption taxes will exacerbate markups, resulting in lower private consumption. Wages also increase, and output reacts negatively.