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Money and monetary policy


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Published in: Economy & Finance, Business

Money and monetary policy

  2. 2. 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.
  3. 3. FUNCTIONS OF MONEY 1. Medium of exchange 2. Unit of account 3. Store of value 4. Standard for deferred payments
  4. 4. 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.
  5. 5. 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
  6. 6. Money supply Composition M1 or narrow money  currency a. coins b. paper money  demand deposits M2 or broad money  Quasi money deposit a. Savings deposit b. Time deposit M3 or total liquidity  deposits substitutes a. promissory notes b. commercial paper M4  currency deposits of non bank residents Table 10.1 Composition of money supply Table 10.1 present the four major measures of money supply in the Philippines
  7. 7. 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 < 360 days L-T > 360 day saving deposit rates 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 8.03 9.48 5.00 5.25 6.26 5.18 4.93 3.43 4.07 2.68 3.06 10.49 10.76 9.18 8.03 8.18 6.03 5.01 3.06 3.96 2.50 2.07 7.37 7.52 4.24 4.21 4.26 3.76 3.55 2.20 2.22 2.07 1.60 Source: bangko sentral ng pilipinas
  8. 8. 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
  9. 9. 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.
  10. 10.  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
  11. 11. 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.
  12. 12. 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.
  13. 13. 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
  14. 14.  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.
  15. 15.  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.
  16. 16.  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.