Monetary policy is the process by which the monetary authority of a country controls the supply of

money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the
currency.
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.
1. Open Market Operations
Open market operations are when central banks buy or sell securities from the country's banks. When the
central bank buys securities, it adds cash to the banks' reserves.
That gives them more money to lend. When the central bank sells the securities, it just places them on
the banks' balance sheets and reduces its cash holdings. The bank now has less to lend. A central bank
buys securities when it wants expansionary monetary policy, and sells them when it
executescontractionary monetary policy.
Quantitative Easing (QE) is open market operations on steroids. Before the recession, the U.S. Federal
Reserve maintained between $700 to $800 billion of Treasury notes on its balance sheet. It added or
subtracted to affect policy, but kept it within that range. QE nearly quintupled this amount to more than $4
trillion by 2014.
2. Reserve Requirement
The reserve requirement refers to the deposit a bank must keep on hand overnight, either in its vaults or
at the central bank. A low reserve requirement allows the banks to lend more of their deposits. It's
expansionary because it creates credit.
A high reserve requirement is contractionary since it gives banks less money to loan. It's especially hard
for small banks since they don't have as much to lend in the first place. Central banks rarely change the
reserve requirement because it's expensive and disruptive for member banks to modify their procedures.

Instead, central banks are more likely to adjust the targeted lending rate because it achieves the same
result. The Fed funds rate is perhaps the most well-known of these tools. Here's how it works. If a bank
can't meet the reserve requirement, it borrows from another bank that has excess cash. The interest rate
it pays is the Fed funds rate. The amount it borrows is called the Fed funds. The Federal Open Market
Committee (FOMC) sets a target for the Fed funds rate at its meetings.
Central banks have several tools to make sure the rate meets that target. The Federal Reserve, the Bank
of England, and the European Central Bank pay interest on the required reserves and any excess
reserves. Bank won't lend Fed funds for less than the rate they're receiving from the Fed for these
reserves. Central banks also use open market operations to manage the funds rate.
3. Discount Rate
The discount rate is the third tool. It's the rate that central banks charge its members to borrow at
its discount window.
Since the rate is high, banks only use this if they can't borrow funds from other banks.

1. 1. CHAPTER 10 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 Republics 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.

1. General Acceptability:
It is the very essence of money. Unless a person knows that the money which he accepts in exchange for
his goods or services will be taken without any objection by others as well, he will not accept it.
ADVERTISEMENTS:
ADVERTISEMENTS:
It will cease to be current. In order to possess general acceptability, a commodity should have some
intrinsic utility independent of its value for monetary purpose. Gold and silver are generally acceptable to
all without any hesitation because they are used for ornamental and other purposes and can be easily
sold as bullion, besides being used for monetary purposes.
2. Portability:
A commodity fit to be used as money must be such that it can be easily and economically transported
from one place to the other. In other words, it must possess high value in small bulk. Precious metals
possess this quality. In the case of oxen and grain, a small value occupies a large bulk and weight; hence,
they are unsuited as money commodity.

3. Indestructibility or Durability:
As money is passed from hand to hand and is kept in reserve, it must not easily deteriorate, either in itself
or as a result of wear and tear. It must not evaporate like alcohol, nor purely like animal substance, nor
decay like wood, nor rust like iron.
ADVERTISEMENTS:
Destructible articles, such as eggs, dried cod fish, cattle or oil has certainly been used as currency; but
what is treated as money one day must not soon afterwards be eaten up. Gold coins are very lasting;
they take about 8,000 years to wear out completely. Silver coins are not equally lasting but wear out fairly
slowly. As such gold and silver are considered to be excellent money commodities.
4. Homogeneity:
All portions or specimens of the substance used as money should be homogeneous, that is, of the same
quality, so that equal weights have exactly the same value. In order that a commodity may be used as a
measure of value, it is essential that its units are similar in all respects. Gold and silver are of the same
quality throughout; their various parts are similar in chemical and physical composition and their
consistency is the same throughout the mass.
5. Divisibility:
The money material should be capable of division; and the aggregate value of the mass after division
should be almost exactly the same as before. If we use diamond as money and by chance it drops from
our hand and breaks, we will suffer an enormous loss. This is not the case with precious metals. Their
portions can be melted and remelted together any number of times without much loss.
6. Malleability:
The money material should be capable of being melted, beaten and given convenient shapes. It should
be neither too hard nor too soft. If the former, it cannot be easily coined; If the latter, it would not last long.
It should also possess the attribute of impressionability so that it may easily receive the impressions.

7. Cognizability:
By it, we mean the capability of a substance for being easily recognised and distinguished from all other
substances. As a medium of exchange, money has to be continually handed about; and it will cause great
inconvenience if every person receiving it has to scrutinise, weigh and test it.
It should have certain distinct marks which nobody can mistake. Gold and silver are at once recognised
by their distinctive colour, metallic and heavy weight for small bulk, and, as such, satisfy this condition
admirably
8. Stability of Value:
Money should not be subject to fluctuations in value. Fluctuating standard of value is just like a changing
yard or kilogram. The value of a material, which is used to measure the value of all the other materials,
must be stable.
The ideal money commodity should, as such, possess utility, portability, durability, homogeneity,
divisibility, malleability, Cognoscibility and stability of value.