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MONEY AND MONETARY POLICIES

Introduction

Contractionary monetary policy slows the rate of growth in the money supply or outright
decreases the money supply in order to control inflation; while sometimes necessary,
contractionary monetary policy can slow economic growth, increase unemployment and
depress borrowing and spending by consumers and businesses.

Money is fundamental in the functioning of the economy. It facilitates the exchange goods and
service and reduces the amount of time and effort to carry out a trade transaction.

Functions of money
Medium of exchange
Unit of account
Store of value
Standard for deferred payments.

Demand for money


Transaction demand
Precautionary demand
Speculative demand

Composition of money supply


1) Narrow money
Currency ( coins , paper money)
Demand deposits
2) Broad money
Quasi money deposit ( savings deposit , time deposit
3) Total domestic liquidity
Deposits substitutes ( promissory notes , commercial paper )

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 include :
Bangko Sentral ng Pilipinas (BSP)
Banking System
Non-Bank Financial Institutions

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 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 Central Bank Act , the BSP performs the ff. functions, all of which relate to its
status as the Republics Central Monetary authority.
Liquidity Management
Currency Issue
Lender of Last Resort
Financial Supervision
Management of Foreign Currency Reserves
Determination of Exchange Rate Policy

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


Non-Bank Financial Institutions (NBFIs) refer to all financial institutions other than bank
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 investors, stock brokers, money brokers, investment houses,
financing companies, insurance companies, and intermediaries performing quasi banking
functions.

Monetary policy - is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by
the government of a country to achieve macroeconomic objectives like inflation, consumption,
growth and liquidity. Monetary policy is the macroeconomic policy laid down by the central
bank. It involves management of money supply and interest rate and is the demand side
economic policy used by the government of a country to achieve macroeconomic objectives like
inflation, consumption, growth and liquidity.

The primary objective of BSP's monetary policy is to promote a low and stable inflation
conducive to a balanced and sustainable economic growth. The adoption of inflation targeting
framework for monetary policy in January 2002 is aimed at achieving this objective.

Open-market operations,
Discount rate, and
Reserve requirements.
Open Market Operations (OMO)

Reverse Repurchase/Repurchase transactions

In a repurchase transaction, the BSP buys government securities (GS) from a bank with a
commitment to sell them back at a specified future date at a predetermined rate, resulting in an
expansionary effect on liquidity. Conversely, in a reverse repurchase (RRP) operation, the BSP
also acts as the seller of GS and the banks payment to the BSP has a contractionary effect on
liquidity.The interest rate for the overnight RRP facility signals the monetary policy stance and
serves as the BSP s primary monetary policy instrument. The RRP facility is offered to qualified
counterparties daily using a fixed-rate and full-allotment method, where individual bidders are
awarded a portion of the total offered amount depending on their bid size.

Outright purchases and sales of securities

An outright contract involves direct purchase/sale of government securities by the BSP from/to
the market for the purpose of increasing/decreasing money supply on a more permanent basis. In
such a transaction, the parties do not commit to reverse the transaction in the future, creating a
more permanent effect on the banking systems level of money supply.

Foreign exchange swaps

Foreign exchange swaps refer to transactions involving the actual exchange of two currencies
(principal amount only) on a specific date at a rate agreed on the deal date (the first leg), and a
reverse exchange of the same two currencies at a date further in the future (the second leg) at a
rate (different from the rate applied to the first leg) agreed on deal date.

Discount Rate -The Monetary Board decided to maintain the interest rate on the BSPs
overnight reverse repurchase (RRP) facility at 3.0 percent. The corresponding interest rates on
the overnight lending and deposit facilities were also kept steady. The reserve requirement ratios
were likewise left unchanged.

SECTION 94. Reserve Requirements. In order to control the volume of money created by
the credit operations of the banking system, all banks operating in the Philippines shall be
required to maintain reserves against their deposit liabilities: Provided, That the Monetary Board
may, at its discretion, also require all banks and/or quasi-banks to maintain reserves against funds
held in trust and liabilities for deposit substitutes as defined in this Act. The required reserves of
each bank shall be proportional to the volume of its deposit liabilities and shall ordinarily take
the form of a deposit in the Bangko Sentral. Reserve requirements shall be applied to all banks of
the same category uniformly and without discrimination.

Reserves against deposit substitutes, if imposed, shall be determined in the same manner as
provided for reserve requirements against regular bank deposits, with respect to the imposition,
increase, and computation of reserves.
The Monetary Board may exempt from reserve requirements deposits and deposit substitutes
with remaining maturities of two (2) years or more, as well as interbank borrowings.

Since the requirement to maintain bank reserves is imposed primarily to control the volume of
money, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the
Monetary Board decides otherwise as warranted by circumstances.
Economics 2 -Microeconomics

Money and Monetary Policies

Submitted by

Michelle A. Bulatao

Mary Anne P. Norcio

Maridane Moya

Abigail Cortias

Kim Donnel Samarita

BSBA III

Submitted to

Ms. Marissa Rivera

March 15, 2017

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