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JEL Classification System

C32, E44, E62, H32, H63, O11, O23

Abstract

The Philippine government has suffered greatly from fiscal imbalances for the past few decades. The largest fiscal deficit was recorded at PhP112 billion in 2017. Fiscal reforms led to a considerable decline of the national government debt from 52.4% of GDP in 2010 to 44.8% in 2015. The study aims to investigate the Philippine fiscal policy and its link to asset prices, as measured by the changes in the Philippine Stock Exchange Index (PSEI). Quarterly observations from 2001 to 2017 of monetary, fiscal, and economic variables were used on a vector error correction model (VECM) to observe their long-run relationship with the stock market index. The results indicate that policy rates, government revenue, inflation rates, and GDP influence stock prices positively, but foreign interest rates and government expenditures have a negative effect on the stock exchange in the long run. All of these are in accordance with a priori expectations except for the inflation rates. This study also confirms the existence of a long-run relationship between all of the variables and the PSEI. The empirical evidence nonetheless suggests that 28% of the deviations of the PSEI from its long-run equilibrium due to short-run shocks are corrected after a quarter. Hence, it will take about three to four quarters for the PSEI to go back to its equilibrium level.

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