the philippine monetary system and policy

8/17/2019 The Philippine Monetary System and Policy

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P r e p a r e d B y : S h e i l a E . M a l o l e s , M M T

The Philippine Monetary

System and Policy


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The Fnctions of Money

Money has three fnctions in theeconomy$

Medim of e%change&nit of accontStore of "ale


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Medim of E%change A medium of exchange is an item that !yers gi"e to sellers 'hen they 'ant toprchase goods and ser"ices#

A medim of e%change is anything that isreadily accepta!le as payment#


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&nit of Accont A unit of account is the yardstic( people se to

post prices and record de!ts#

Store of )ale A store of value is an item that people can se to

transfer prchasing po'er from the present to

the ftre#


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*i+idity Liquidity is the ease 'ith 'hich an asset

can !e con"erted into the economy,smedim of e%change#


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The -inds of Money

Commodity money ta(es the form of acommodity 'ith intrinsic "ale#E%amples$ Gold. sil"er. cigarettes#

Fiat money is sed as money !ecase ofgo"ernment decree# It does not ha"e intrinsic "ale#

E%amples$ /oins. crrency. chec( deposits#


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Money in the S# Economy

Currency is the paper !ills and coins in thehands of the p!lic#

Demand deposits are !alances in !an(acconts that depositors can access ondemand !y 'riting a chec(#


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Monetary policy of the Philippines

Monetary policy is the monitoring andcontrol of money spply !y a central !an(.sch as the Federal 0eser"e 1oard in the

&nited States of America. and the 1ang(o Sentral ng Pilipinas in the Philippines# Thisis sed !y the go"ernment to !e a!le to

control inflation. and sta!ili2e crrency#

https://en.wikipedia.org/wiki/Monetary_policyhttps://en.wikipedia.org/wiki/Federal_Reserve_Boardhttps://en.wikipedia.org/wiki/United_States_of_Americahttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/Bangko_Sentral_ng_Pilipinashttps://en.wikipedia.org/wiki/United_States_of_Americahttps://en.wikipedia.org/wiki/Federal_Reserve_Boardhttps://en.wikipedia.org/wiki/Monetary_policy


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Money Spply Indicator

Money spply indicators are often fond tocontain necessary information for predictingftre !eha"ior of prices and assessing

economic acti"ity#These are sed !y economists to confirm

their e%pectations and help forecast trends

in consmer price inflation#


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One can predict. to a certain e%tent. thego"ernment7s intentions in reglating the economyand the conse+ences that reslt from it# For

e%ample. the go"ernment may opt to increasemoney spply to stimlate the economy or thego"ernment may opt to decrease money spply tocontrol a possi!le mishap in the economy#

Money Spply Indicator

https://en.wikipedia.org/wiki/Money_supplyhttps://en.wikipedia.org/wiki/Money_supply


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M1: Narrow Money

M8 incldes crrency in circlation# It is the !asemeasrement of the money spply and incldes cash

in the hands of the p!lic. !oth !ills and coins. plspeso demand deposits. torists, chec(s from non; !an( issers. and other chec(a!le deposits# 1asically.these are fnds readily a"aila!le for spending#

Ad


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M2: Broad Money

This is termed !road money !ecase M9 incldes a !roader set of financial assets held principally !y

hoseholds#

This contains all of M8 pls pesosa"ing deposits 5money mar(et deposit acconts6.time deposits and !alances in retail money mar(etmtal fnds#

https://en.wikipedia.org/wiki/Time_deposithttps://en.wikipedia.org/wiki/Mutual_fundshttps://en.wikipedia.org/wiki/Mutual_fundshttps://en.wikipedia.org/wiki/Time_deposit


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M3: Broad Money Liabilities

1road Money *ia!ilities inclde M9 plsmoney s!stittes sch as promissory notes and commercial papers#

https://en.wikipedia.org/wiki/Promissory_noteshttps://en.wikipedia.org/wiki/Promissory_notes


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M4: Li!idity Money

These inclde M: pls transfera!ledeposits. treasry !ills and deposits held inforeign crrency deposits# Almost all short;

term. highly li+id assets 'ill !e inclded inthis measre#

https://en.wikipedia.org/wiki/Treasury_billshttps://en.wikipedia.org/wiki/Treasury_bills


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"#pli$ations

If the "elocity of M8 and M9 money stoc( has !een lo'.this indicates that there is a lot of money in the hands ofconsmers and money is not changing hands fre+ently#

Generally 'e 'old e%pect that 'hen money spplyindicators are gro'ing faster than interest rates plsgro'th rate or inflation. 'hiche"er is higher. interestrates shold possi!ly !e increased# This shold only

generally apply 'hen !road measres of money spplygro'th are higher than narro' measres. to rle otsome of the measrement error isses that cold emerge#


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Monetary Policy Instrments

%pen Mar&et %perations

Open Mar(et Operations consist of reprchase andre"erse reprchase transactions. otright

transactions. and foreign e%change s'aps#


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'ep!r$hase and 'e(erse 'ep!r$hase

This is carried ot throgh the 0eprchase Facilityand 0e"erse Prchase Facility of the 1ang(o Sentralng Pilipinas#

In Prchase transactions. the 1ang(o Sentral !ysgo"ernment secrities 'ith a dedication to sell it !ac( at a specified ftre date. and at apredetermined interest rate#


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The 1SP,s payment increases reser"e !alances ande%pands the monetary spply in the Philippines# Onthe other hand. in 0e"erse 0eprchase. thego"ernment acts as the seller. and 'or(s to decreasethe li+idity of money#

These transactions sally ha"e matrities rangingfrom o"ernight to one month#


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%!tri)ht Transa$tions

&nli(e the reprchase or re"erse reprchase. there isno clear intent !y the go"ernment to re"erse theaction of their selling=!ying of monetary secrities#Ths. this transaction creates a more permanenteffect on or monetary spply# >?hen the 1SP !yssecrities. it pays for them !y directly crediting itsconterparty,s @emand @eposit Accont 'ith the

1SP#

The re"erse is done pon the selling ofsecrities#


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*orei)n E+$han)e Swaps

This refers to the actal e%change of t'o crrenciesat a specific date. at a rate agreed pon the deal date

and the re"erse e%change of the crrencies at afarther ate in the ftre. also at an interest rateagreed on deal date#


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$$eptan$e o- *i+edTer# /eposits

To e%pand its li+idity management. the 1ang(oSentral introdced this method in 8BBC# In theSpecial @eposits Accont. or S@A. consists fi%edterms deposits !y !an(s and instittions affiliated

'ith the 1SP#


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Standin) *a$ilities

To increase the "olme of credit in the financialsystem. the 1ang(o Sentral ng Pilipinas e%tendsloans. disconts. and ad"ances to !an(inginstittions# >0edisconting is a standing creditfacility pro"ided !y the 1SP to help !an(s meettemporary li+idity needs !y refinancing the loansthey e%tend to their clients#

There are t'o types of redisconting in the 1SP$ thepeso redisconting facility and the E%porter,s dollarand Yen 0ediscont Facility#


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'eser(e 'e!ire#ents

In !an(ing instittions. there are re+ired amontsthat !an(s cannot lend ot to people# They al'aysneed to maintain a certain !alance of money. 'hichare called Dreser"esD# Once these reser"ere+irements are changed and are "aried. changes inthe monetary spply 'ill !e o!ser"ed greatly#

Two *or#s:

0eglar or Stattory 0eser"es*i+idity 0eser"es

https://en.wikipedia.org/wiki/Bank_reserveshttps://en.wikipedia.org/wiki/Bank_reserves


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Philippine Monetary=/rrency Policy

Ban)&o Sentral n) Pilipinas

The 1ang(o Sentral ng Pilipinas or 1SP is the centralmonetary athority of the rep!lic of the Philippines#

It pro"ides policy directions in the areas of money. !an(ing and credit and e%ists to sper"ise operationsof !an(s and e%ercises reglatory po'ers o"ernon;!an( financial instittions# It (eeps

aggregate demand from gro'ing rapidly 'ithreslting high inflation. or from gro'ing too slo'ly.reslting in high nemployment#B

https://en.wikipedia.org/wiki/Philippineshttps://en.wikipedia.org/wiki/Non-bank_financial_institutionhttps://en.wikipedia.org/wiki/Aggregate_demandhttps://en.wikipedia.org/wiki/Unemploymenthttps://en.wikipedia.org/wiki/Monetary_policy_of_the_Philippines#cite_note-9https://en.wikipedia.org/wiki/Monetary_policy_of_the_Philippines#cite_note-9https://en.wikipedia.org/wiki/Unemploymenthttps://en.wikipedia.org/wiki/Aggregate_demandhttps://en.wikipedia.org/wiki/Non-bank_financial_institutionhttps://en.wikipedia.org/wiki/Philippines


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The primary o!


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Philippine Monetary *ra#ewor& ": 10s to early 100s

In the past. the 1SP follo'ed the monetary aggregatetargeting approach to monetary policy# This approach is !ased on the assmption that there is a sta!le andpredicta!le relationship !et'een money. otpt and

inflation#In particlar. all money aggregates. 'ith the e%ception of

reser"e money. are incorporated 'ith otpt and interestrate# This means that there is a long;rn relationship

!et'een money on one hand and otpt and interest rateon the other so that e"en if there are shoc(s in the economy.the "aria!les 'ill retrn to their trend e+ili!rim le"els#


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This means that changes in money spply 5on theassmption that "elocity is sta!le o"er time6 aredirectly related to price changes or to inflation# Ths.it is assmed that the 1SP is a!le to determine thele"el of money spply that is needed gi"en thedesired le"el of inflation that is consistent 'ith theeconomy7s gro'th o!


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Philippine Monetary *ra#ewor& "": !ne 100 to Present

The 1SP employs a modified frame'or( !eginning thesecond semester of 8BB in attempt to enhance theeffecti"eness of the monetary policy !y complementingmonetary aggregate targeting 'ith some form of inflation

targeting. placing greater emphasis on price sta!ility#/ertain (ey modifications inclde$

Allo's !ase money le"els to go !eyond target as long as theinflation rates are met

An e%cess of one or more percentage points of inflation o"erthe program indces mopping p operation !y the 1SP to !ring do'n !ase money to the pre"ios month,s le"el


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&nder an aggregate targeting frame'or(. the 1SPfi%es money gro'th so as to minimi2e e%pectedinflation# On the other hand. nder the ne'frame'or(. 1SP sets monetary policy so that pricele"el is not


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?ith this approach. the 1SP can e%ceed themonetary targets as long as the actal inflation rateis (ept 'ithin program le"els and policyma(ersmonitor a larger set of economic "aria!les in ma(ingdecisions regarding the appropriate stance ofmonetary policy#


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5!rrent pproa$h: "n-lation Tar)etin)

As mentioned earlier. Inflation Targeting re+ires ap!lic annoncement of an inflation rate that a contry 'ill target for the coming years. or in a gi"en period oftime# It focses on maintaining a lo' le"el of inflation.that 'hich is considered to !e optimal. or at least 'oldallo' the contry to ha"e ample economic gro'th# Itsmain desire is to achie"e price sta!ility as the ltimateend goal of the monetary policy#

The Philippines formally adopted Inflation Targeting asthe frame'or( for Monetary Policy on anary 99#


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The Philippines, inflation target is measred throghthe /onsmer Price Inde% 5/PI6# For 9B. inflationtarget has !een set to !e :# percent. ha"ing a 8Jtolerance le"el. and K# percent for 98. also ha"ing8J tolerance# Also. the Monetary 1oard of thePhilippines annonced a target of arond KL8percent from 989 to 98K#


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Monetary Policy Isses

E%change rates play a significant role in monetarytransmission mechanism and at the same time. it canha"e a large impact on inflation rates# Althogh the1SP has adopted the inflation targeting approach. itmay !e tempted to ine%plicitly target e%change rate toachie"e its lo' inflation target# The isse here is thee%tent of the e%change rate pass;throgh or E0PT todomestic prices since higher E0PT 'old re+ire the1SP to shift its attention to e%change rate mo"ementsto sta!ili2e prices#

https://en.wikipedia.org/wiki/Exchange_rateshttps://en.wikipedia.org/wiki/Exchange_rateshttps://en.wikipedia.org/wiki/Exchange_rateshttps://en.wikipedia.org/wiki/Exchange_rates


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'ole o- Monetary ))re)ates

Since the shift to inflation targeting. 1SP has alreadya!andoned monetary aggregates !ecase itsinformation content has apparently declined in therecent years# Moreo"er. it is also assmed that a shiftof approach 'as necessary !ecase moneyaggregates are normally not good indicators of ftreeconomic policy re+irements de to nrelia!ility ofmeasrement#


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Meas!re#ent o- "n-lation and Li!idity Trap

Since inflation targeting leads to lo'er and sta!leinflation rates. more impro"ement shold then !egi"en to the measrement of the consmer priceinde% since fe' percentage points ha"e greaterrepercssions 'hen rates are lo'# Errors in /PImeasrement cold lead to ineffecti"e andnsita!le monetary policy response !y the 1SP

'hich definitely reslt to detrimental effects to theeconomy#


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Another isse arising from monetary policies is theli+idity trap# This happens 'hen inflation ratedeclines too mch leading to a threat of deflation#*i+idity trap is defined as a sitation in 'hich thereare 2ero nominal interest rates. persistent deflationand deflation e%pectations# In the e"ent this occrs.

!onds and money earn the same real rate of retrnths ma(ing people indifferent to holding !onds ore%cess money#

https://en.wikipedia.org/wiki/Liquidity_traphttps://en.wikipedia.org/wiki/Liquidity_trap


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B!d)et /e-i$it and E+ternal /ebts

Gi"en high !dget deficits. the go"ernment isconcerned a!ot t'o closely related isses$ it does not

'ant to pay "ery high interest on its !orro'ings and itdoes not 'ant to cro'd ot the mar(et#

Ideally. the go"ernment cold raise ta% re"enes toa"oid !orro'ing hge sms from the mar(et#Ho'e"er. the go"ernment opted to !orro' from theinternational capital mar(et and thogh rates are lo'.these ha"e shorter matrity and contry,s otstandinge%ternal de!t has contined to mo"e to'ards a lessideal position#


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*is$al /o#inan$e

According to the fiscal theory of the price le"el. it isnot the non;interest !earing money !t the totalnominal lia!ilities inclding interest !earing notesand ftre fiscal srplses that matter for price;le"el

determination# In the a!sence of fiscal discipline. anindependent central !an( sch as the 1SP cannotgarantee a sta!le nominal anchor# In other 'ords.for the 1SP to sccessflly focs on price sta!ility.there mst !e a credi!le commitment on the part ofthe National Go"ernment to redce total fiscal deficits !y a meaningfl amont#


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0eferences

"Monetary Policy" . Retrieved May ! #$. %heda Disha. "&n 'vervie( of )ey Money *upply +ndicators , M$ M and M#" . Data-$.

Retrieved May / #$.

" Monetary Policy , 0lossary and &11reviations". %ang2o *entral ng Pilipinas. Retrieved May / #$.

3'ther Money *upply +ndicators" . Data-$. Retrieved May / #$.

" Money *upply, 4#5.$.$67" . Retrieved May ! #$.

" +nflation 8argeting9 8he %*P:s &pproach to Monetary Policy". Retrieved May !#$.

" Currency *(ap Definition" . Retrieved May ! #$. "FR%9 Reserve Requirements". &rchived from the original on #$$,$#,!. RetrievedMay ! #$.

"M&;D&8" . ?niversity of the Philippines Diliman. Retrieved May / #$.

" +nflation 8argeting9 8he %*P:s &pproach to Monetary Policy". Retrieved May / #$.

Lam1erte Mario. "Central 1an2ing in the Philippines9 8hen ;o( and the Future" 4PDF7. Philippine +nstitute for Development *tudies. Retrieved May ! #$.

Mariano and @illanueva Ro1ert and Delano. "Monetary policy approaches and implementationin &sia9 the Philippines and +ndonesia" 4PDF7. Retrieved May #$ #$.
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the philippine monetary system and policy

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