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Final Lesson 7 Money and Monetary Policy

Money takes several forms and serves important economic functions. It facilitates transactions and reduces trade friction. The money supply consists of currency in circulation and bank deposits, with different measures accounting for components like savings. Demand for money stems from transactional, precautionary, and speculative motives. Monetary policy aims to regulate the money supply through tools like open market operations, reserve requirements, and moral suasion to influence economic growth and prices. The Philippine financial system includes the central bank, commercial banks, and non-bank institutions that mobilize savings and allocate credit.

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Kerby Christian Araneta Ondoy
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114 views18 pages

Final Lesson 7 Money and Monetary Policy

Money takes several forms and serves important economic functions. It facilitates transactions and reduces trade friction. The money supply consists of currency in circulation and bank deposits, with different measures accounting for components like savings. Demand for money stems from transactional, precautionary, and speculative motives. Monetary policy aims to regulate the money supply through tools like open market operations, reserve requirements, and moral suasion to influence economic growth and prices. The Philippine financial system includes the central bank, commercial banks, and non-bank institutions that mobilize savings and allocate credit.

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Kerby Christian Araneta Ondoy
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© © All Rights Reserved
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•MONEY

AND
•MONETARY
POLICY
WHAT IS
MONEY ?
money is fundamental in the
functioning of the economy.
It facilitates the exchange of goods and
service and reduces the amount of time
and effort to carry out a trade
transaction.
FUNCTIONS OF
MONEY
1. Medium of exchange
2. Unit of account
3. Store of value
4. Standard for deferred payments
Demand for
money
The demand for money refers to holding on with
your money and the following are the three types of
demand:

1. Transaction demand
 The transaction motives for demanding from the fact
that most transactions involve an exchange of money.
2. Precautionary demand
 people often demand money as a precaution
against an uncertain future. Unexpected expenses, such
as medical or car repair bills, often require immediate
payment.
3. Speculative demand
 Money is also a way for people to store wealth.
Composition of money
supply
The Bangko Sentral ng Pilipinas (BSP) defines money on the basis of its
components and there are four measures, namely:

 ( m1) narrow money


 (m2) broad money
 (m3) Total domestic liquidity
 m4
Table 10.1
Composition of money supply

Money supply Composition


 currency
M1 or narrow money a. coins
b. paper money
 demand deposits

 Quasi money deposit


M2 or broad money a. Savings deposit
b. Time deposit

 deposits substitutes
M3 or total liquidity a. promissory notes
b. commercial paper
M4 currency deposits of non
bank residents

Table 10.1 present the four major measures of money supply in the Philippines
Table 10.2
Time and Saving deposit rates in the Philippines, 2000-2010
(weighted averages in percent per annum)

Domestic time deposit rates


Interest rate S-T < L-T > saving deposit
360 days 360 day rates
2000 8.03 10.49 7.37
2001 9.48 10.76 7.52
2002 5.00 9.18 4.24
2003 5.25 8.03 4.21
2004 6.26 8.18 4.26
2005 5.18 6.03 3.76
2006 4.93 5.01 3.55
2007 3.43 3.06 2.20
2008 4.07 3.96 2.22
2009 2.68 2.50 2.07
2010 3.06 2.07 1.60
Source: bangko l ng pilipinas
sentra
Philippine Financial
System
The Philippine Financial System consists of three major groups of
Institutions involved in the mobilization and intermediation of
private savings as well as allocation of financial resources. These
institutions includes:

 Bangko Sentral ng Pilipinas (BSP)

 Banking System

 Non-Bank Financial Institutions


Bangko Sentral ng Pilipinas (BSP)
 The Bangko Sentral ng Pilipinas (BSP) was created in 1993, replacing the
earlier Central Bank of the Philippines which began operations in 1949.
 The primary mandate of the BSP is to maintain price stability conducive to
a balanced and sustainable economic growth.
 The BSP provides the policy direction in the areas of money, banking and
credit.
 It supervises operations of the bank and exercises regulatory powers over
no-bank financial institutions with quasi-banking functions.
 Under the New Central Bank Act, the BSP performs the ff. functions, all of
which relate to its status as the Republic’s Central Monetary authority.

 Liquidity Management
 Currency Issue
 Lender of last Resort
 Financial Supervision
 Management of Foreign Currency Reserves
 Determination of Exchange Rate Policy
 Other Activities
Banking
System
 The Philippine Banking System consists of duly licensed and registered
banking entities engaged in the lending of funds obtained in the form of
deposits.
 These institutions includes Universal Banks, Commercial Banks, Thrift
Banks, Rural Banks, Cooperative Banks, and Islamic Banks.
Non-Bank Financial
Institutions
 No-Bank Financial Institutions (NBFIs) refer to all Financial Institution other
than banks engaged principally in the provisions of a wide range of
financial services.
 NBFIs are engaged in a variety of financial services, which include those
performed by pawnshops, lending investor, stock brokers, money brokers,
investment houses, financing companies, insurance companies, and
intermediaries performing quasi banking functions.
Monetary Policy
Instruments
 Monetary Policy
Measures or action by Central Bank to regulate the supply of money
in the Economy.
 Monetary policy actions of the BSP are aimed at influencing the timing
cost and availability of money and credit, as well as other financial factors,
for the purpose of influencing the price level.
In the Philippines, monetary policy instruments are classified into:
 Open Market Operations (OMO)
 Rediscounting
 Reserve Requirement
 Direct Controls
 Moral Suasion
 Open Market Operations (OMO)

It involves the buying and selling of government securities from banks and
financial institutions of the BSP in order to expand or contract the supply
of money.

 Rediscounting

 This refers to transactions whereby the BSP extends credit to a bank


collateralized by its loan papers with customers.
 This Instrument plays a dual role; as a tool to allocate credit to preferred
sectors of the economy and as an instrument to influence the supply of
money and credit.
 Rediscounting Rate is the interest rate charged by the BSP to the banks
that borrow from them.
 Reserve Requirement

 This is the minimum amount of reserves that bank must hold against
deposits.
 The reserve requirements which are held by banks as cash in their vaults
and deposits with the BSP, help to control the money and credit by
affecting the demand for money reserves and the money multiplier.
 It serves as a prudential safeguard for depositors.

 Direct Controls

 This consist of quantitative and qualitative limits on the ability of banks to


undertake certain activities.
 The most common type of direct controls include limitations on aggregate
bank lending, selective limitations on certain types of banks lending and
interest rate regulations.
 Moral Suasion

The BSP persuade banks to make their lending policies responsive to


the needs of the economy.

Banks must tighten their credit programs in times of inflation and


loosen them in times of recession.

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