CHAPTER 10

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

M1 or narrow money
M2 or broad money
M3 or total liquidity
M4
 currency
a. coins
b. paper money
 demand deposits
 Quasi money deposit
a. Savings deposit
b. Time deposit
 deposits substitutes
a. promissory notes
b. commercial paper
 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 sentral ng pilipinas
 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.