Within the context of the Phillips curve, the capacity of government policy to bolster aggregate demand depends wholly on the inverse relationship between inflation and unemployment. At the point defined by the natural rate of unemployment, further increases in government spending become purely inflationary. This paper investigates the relationship between inflation and unemployment, and its relevance to the Philippine economy. The results confirm the inverse relationship between inflation and unemployment within the contemporary Philippine setting. Moreover, time series data on unemployment suggest that the economy is on or near full employment. Output gap estimates support this finding, indicating that the Philippines is operating close to its natural level of unemployment.
The findings suggest the urgency of reassessing existing spending strategies. Maintaining the public spending status quo runs the heightened risk of inducing runaway inflation in the medium term. This paper emphasizes the importance of a rule-based framework to govern monetary and fiscal policies in order to mitigate economic risks. It also underscores the importance of strategic spending to ensure long-term macroeconomic stability and sustainable growth.