COURSE MODULE

IN

MONETARY POLICY AND CENTRAL BANKING

Compiled and Written

By

PROFESSOR: FAELICE M. MENDOZA

PROFESSOR: ELISA I. VICTORIA
 I. COURSE CODE AND TITLE:
FINP 4 - MONETARY POLICY AND CENTRAL BANKING

II. LESSON NUMBER: 1 (Week 1)

III. TOPIC:
MODULE I: PHILIPPINE FINANCIAL SYSTEM
A. The Philippine financial system
Driven by aggressive economic policy and structural changes in the 1980s and
1990s, the complexity of the Philippine financial system has gradually increased.
The sustained thrust of the reform process in the 1990s facilitated the rapid
expansion and eventual integration of the local financial system with the rest of the
world. The structural reforms that allowed freer entry of foreign capital paved the
way for healthy competition and increased efficiency with the introduction of new
technology, greater transparency and broader opportunities for growth. Increased
financial integration has also heightened the country’s vulnerability to external
shocks and exposure to risks. The 1997 Asian financial crisis exposed the
country’s vulnerability to shocks. While a number of policy measures were put in
place to address these weaknesses, the emergence of new risk would require
constant recalibration of such measures and the evolution of new ones.

IV. LEARNING OBJECTIVES:

At the end of this lesson, the student should be able to:
1. Explain what is a financial system in a nutshell.
2. Perceive the financial system in the Philippines and its operating environment.
3. Raise awareness of the role of Bangko Sentral ng Pilipinas in maintaining the safety
and stability of the financial system in general.

V. MODULE PRE-ASSESSMENT:
1. _______ An organized or established set of procedures.
2. _______ It consists of institutional units and markets that interact, typically in a
complex manner, for the purpose of mobilizing funds for investment and providing
facilities, including payment systems, for the financing of commercial activity.
 3. _______ A regulatory body that maintains the safety and stability of the financial
system in general, and the banking system in particular.
4. Provide 3 keywords that come to your mind when you hear the word Central
Banking?
5. Provide 3 keywords that come to your mind when you hear the word Bangko Sentral
ng Pilipinas?

VI. LESSON PRESENTATION:

The Philippine Financial System

Definition of a System:
• A group of units performing
for a common purpose
• An organized set of
doctrines, ideas, or principles
• An organized or established
set of procedures

What is a Financial System?

• “A country’s financial
system include its banks securities markets, pension and mutual funds, insurers, market
infrastructures, central banks, as well as regulatory and supervisory authorities.”-IMF
• “A Financial System consists of institutional units and markets that interact, typically
in a complex manner, for the purpose of mobilizing funds for investment and providing
facilities, including payment systems, for the financing of commercial activity.”–IMF
 In Philippine setting, the
financial system allows the
mobilization of funds
between people who have
them (lenders/savers) and
those who have need of
these funds (borrowers/
spenders) through an
intermediation process that
is carried out in a
systematic manner by Financial Institutions (FIs). The quality of the FIs is integral to the
financial stability and economic growth of a country. FIs, especially banks, play a central
role in mobilizing and channeling funds into investment and other productive uses. Hence,
they play a prominent role in resource allocation, and are the main drivers of economic
development.
The State recognizes this vital role of banks in providing an environment conducive to the
sustained development of the national economy, and the fiduciary nature of banking that
requires high standards of integrity and performance1. Thus, it tasked the Bangko Sentral,
to maintain the safety and stability of the financial system in general, and the banking
system in particular.
This mandate is carried out by the Bangko Sentral through the Financial Supervision
Sector (FSS), which is principally responsible for creating a regulatory environment that
allows the banking system to thrive for the purpose of promoting economic development,
and upholds the public’s trust and confidence in the financial system. The FSS issues
prudential regulations and ensures compliance by Bangko Sentral-Supervised Financial
Institutions (BSFIs) 2 with these prudential requirements. At the same time, the FSS
provides enough incentives for FIs to engage in activities that would allow Filipinos to have
access to appropriate financial products and services.

1
Republic Act No. 8791, otherwise known as The General Banking Law of 2000, Section 2.
2
Ibid,. Section 4, which provides, in part, that the Bangko Sentral shall also have supervision over the operations of and exercise
regulatory powers over quasi-banks, trust entities and other financial institutions, which under special laws are subject to Bangko
Sentral supervision.
VII. GENERALIZATION
The student was able to explain what a financial system is in a nutshell and perceive the
same under Philippine setting vis-à-vis its operating environment. Likewise, the student
was able to introduce the role of Bangko Sentral ng Pilipinas to maintain the safety and
stability of the financial system in general.

VIII. ACTIVITY/EVALUATION:
In Word file, please answer the following to be uploaded in our Google Drive:
1. Explain briefly the financial system in the Philippines
2. Describe the role of Bangko Sentral ng Pilipinas in the financial system.

IX. REINFORCEMENT
In Word file, please answer below assignment to be uploaded in our Google Drive:
1. In your own appreciation after learning the topic, provide 5 keywords that describe the
Philippine financial system.

References:
https://www.nber.org/chapters/c9051.pdf
http://www.bsp.gov.ph/downloads/Publications/2010/StatRep_1Sem2010a.pdf
https://www.bis.org/publ/bppdf/bispap28t.pdf

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 I. COURSE CODE AND TITLE:
FINP 4 - MONETARY POLICY AND CENTRAL BANKING

II. LESSON NUMBER: 2 (Week 2)

III. TOPIC:
MODULE I: THE PHILIPPINE FINANCIAL SYSTEM
A. Elements of financial system
A financial system is made up of a set of complex and closely interconnected
financial institutions, markets, instruments, services, practices, and transactions
intended to provide an efficient and regular linkage between investors and
depositors.

B. History of Central Banking and Bangko Sentral ng Pilipinas (BSP)

A group of Filipinos had conceptualized a central bank for the Philippines as early
as 1933. It came up with the rudiments of a bill for the establishment of a central
bank for the country after a careful study of the economic provisions of the Hare-
Hawes Cutting bill, the Philippine independence bill approved by the US Congress.

IV. LEARNING OBJECTIVES:

At the end of this lesson, the student should be able to:
1. Name the elements of financial system
2. Attain understanding of the importance of the elements of financial system.
3. Write a chronology of events of the evolution of Central Banking and Bangko
Sentral ng Pilipinas

V. MODULE PRE-ASSESSMENT:
1. After learning the concept of Philippine financial system, what are the elements that
may have an impact to the Philippine financial system?
2. ______ An element of the financial system that interpose themselves between the
lenders and borrowers, and earn a margin for the benefits of intermediation
(including lower risk for the lender).
 3. ______ These instruments may be marketable (e.g. treasury bills) or non-
marketable (e.g. retirement annuities)
4. Provide 3 keywords that come to your mind when you encounter the word Central
Banking. Briefly describe each.
5. Provide 3 keywords that come to your mind when you encounter the word Bangko
Sentral ng Pilipinas. Briefly describe each.

VI. LESSON PRESENTATION:

Key Elements of Financial System

1. The ultimate lenders and borrowers, i.e. the non-financial economic units that
undertake the lending and borrowing process. The ultimate lenders lend to borrowers
either directly or indirectly via financial intermediaries, by buying the securities they issue.
2. The financial intermediaries which intermediate the lending and borrowing process.
They interpose themselves between the lenders and borrowers, and earn a margin for
the benefits of intermediation (including lower risk for the lender). They buy the securities
of the borrowers and issue their own to fund these (and thereby become intermediaries)
3. The financial instruments (or assets), which are created/issued by the ultimate
borrowers and financial intermediaries to satisfy the financial requirements of the various
participants. These instruments may be marketable (e.g. treasury bills) or non-marketable
(e.g. retirement annuities).
4. The creation of money by banks when they satisfy the demand for new bank credit.
This is a unique feature of banks. Central banks have the tools to curb money growth.
5. The financial markets, i.e. the institutional arrangements and conventions that exist for
the issue and trading (dealing) of the financial instruments.
6. The price discovery, i.e. the establishment in the financial markets of the price of
money, i.e. the rates of interest on debt (and deposit) instruments and the prices of share
instruments.

History of Central Banking and Bangko Sentral ng Pilipinas (BSP)

“The original Central Bank Act was passed in 1948 and was substantially amended in
1972, that is, 23 years later, to keep pace with the changes in the economy in general and
the financial system in particular. In the 1980s, the CBP encountered severe difficulty in
conducting monetary policy due to the continuous accumulation of loss-making assets.
One important lesson that can be learned from this experience is that a central bank can
reach a point of insolvency where it can continue to service its liabilities only through
accelerating inflation that can have a debilitating effect on the economy. Thus, in 1993, or
roughly 21 years after the original charter of the Central Bank was substantially amended,
a new law was passed creating a new, independent central bank.” Reference: Lamberte
(2003). Central Banking in the Philippines: Then, Now and the Future. p. 70
 Charters I. Broad Policy Objectives I. Traditional Functions

The 1948 1. To maintain monetary stability 1. Sole responsibility of currency

CB 2. To preserve international value issues;
(June) of the peso into other freely 2. Holds and manages the reserves
convertible currencies of the banking system;
3. To promote rising level of 3. Discharges banking services for
production, employment, and real the governments and for the
income. commercial banks;
4. Manages the country’s
international reserves.

The 1972 1. Primarily to maintain internal Basically the same above

CB and external monetary stability in
(November) the Philippines, and to preserve
the international value of the peso
and the convertibility of the peso
into other freely convertible
currencies.
2. To foster monetary credit and
exchange conditions conductive
to a balanced and sustained
growth of the economy.

The 1993 Primarily to maintain price Basically the same above

BSP stability conducive to a balanced
(June) and sustainable growth of the
economy
 Charters III. Organizational IV. Scope of Control
Structure

The 1948 Seven members: The Monetary Board controls not only
CB 1 – Governor (appointed by commercial banks but also all banking
(June) the President for a term of 6 institutions, with the exception of
yrs.) insurance companies. It has both
1 – Secretary of Finance supervisory and policy powers.
(presides the MB meeting)
1 – DBP Governor, 1 - PNB
President,
3 – Private sector
representatives (appointed)

The 1972 Six members: The Central Bank has been given a wider
CB 1 – Governor (appointed by scope of authority to oversee not only the
(November) the President for a term of monetary and banking system but also the
six years; entire financial and credit system.
acts as Chairman of the
Monetary Board)
1 – Ministry of Finance, 1 –
NEDA-BOI
3 – Private sector
representatives (appointed
by the President to a term
of six years)
 The 1993 Seven members: The BSP is tasked to provide policy
BSP 1 – Governor (appointed by directions in the areas of money, banking
(June) the President for a term of and credit. It has supervision over the
six years; Chairman of the operations of banks, finance companies,
Monetary Board) quasi-banks and institutions performing
1 – Cabinet member to be similar functions.
designated by the President
5 – Full-time, appointed by
the President for a term of 6
years.
(Note: No MB member may
be re-appointed more than
once.

VII. GENERALIZATION
The student was able to identify the elements of financial system and understand their
respective roles in the financial system. Moreover, the students was able to plot in
chronological order the evolution of Central Banking and Bangko Sentral ng Pilipinas
and state how they differ from each other.

VIII. ACTIVITY/EVALUATION:
In Word file, please answer the following to be uploaded in our Google Drive:
1. Describe briefly the correlation of the elements of the financial system.
2. Provide a key difference of Central Banking and BSP in terms of:
a. Broad Policy Objectives
b. Functions
c. Organizational Structure
d. Scope of Control
IX. REINFORCEMENT
In Word file, please answer the following to be uploaded in our Google Drive:
1. Write in chronological order the evolution of Central Banking
2. Write in chronological order the evolution of Bangko Sentral ng Pilipinas

References:
https://www.nber.org/chapters/c9051.pdf
http://www.bsp.gov.ph/downloads/Publications/2010/StatRep_1Sem2010a.pdf
https://www.bis.org/publ/bppdf/bispap28t.pdf
http://www.bsp.gov.ph/about/history.asp
https://www.seacen.org/file/file/2016/RP98/CBFR-Chapter5.pdf
https://ebrary.net/16/business_finance/six_elements_the_financial_system

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 I. COURSE CODE AND TITLE:
FINP 4 - MONETARY POLICY AND CENTRAL BANKING

II. LESSON NUMBER: 3 (Week 3)

III. TOPIC:
MODULE II: FINANCIAL CLAIMS
A. Money and its functions
Money is any object that is generally accepted as payment for goods and services
and repayment of debts in a given socioeconomic context or country. Many items
have been historically used as commodity money, including naturally scarce
precious metals, conch shells, barley beads, and other things that were considered
to have value. The value of commodity money comes from the commodity out of
which it is made. The commodity itself constitutes the money, and the money is the
commodity.

IV. LEARNING OBJECTIVES:

At the end of this lesson, the student should be able to:
1. Define what is money and its essential functions in the economy
2. Value money as a commodity and its role in the Philippine economy
3. Make use of the learning to contribute to the stability of the Philippine financial
system

V. MODULE PRE-ASSESSMENT:
1. How important money is in your day-to-day activities? Describe briefly.
2. ______ the basic or primary function of money that serves as an intermediary
3. ______ a function of money where it is the measuring rod, i.e., it is the units in
terms of which the values of other goods and services are measured in money
terms and expressed accordingly
4. _____ a function of money that simplifies borrowing and lending operations as it
generally maintains a constant value through time
5. ______ a function of money where holding money is equivalent to keeping a
reserve of liquid assets because it can be easily converted into other things.
VI. LESSON PRESENTATION:

Financial Claims
Financial claims and obligations arise out of contractual relationships between pairs of
institutional units. A financial claim: (a) entitles a creditor to receive a payment, or
payments, from a debtor in circumstances specified in a contract between them; or (b)
specifies between the two parties certain rights or obligations, the nature of which
requires them to be treated as financial.

Money and its Functions

Money is what people in a society regularly use when purchasing or selling goods and
services. If money were not available, people would need to barter with each other,
meaning that each person would need to identify others with whom they have a double
coincidence of wants—that is, each party has a specific good or service that the other
desires. Money serves several functions: a medium of exchange, a unit of account, a
store of value, and a standard of deferred payment. There are two types of money:
commodity money, which is an item used as money, but which also has value from its
use as something other than money; and fiat money, which has no intrinsic value, but is
declared by a government to be the legal tender of a country.
1. Money as the Medium of Exchange:
Money came into use to remove the inconveniences of barter as money has separated
the act of purchase from sale. Medium of exchange is the basic or primary function of
money. People exchange goods and services through the medium of money. Money acts
as a medium of exchange or as a medium of payments. Money by itself has no utility
(except perhaps to the miser). It is only an intermediary.
2. Money as a Unit of Account or Measure of Value:
Money serves as a unit of account or a measure of value. Money is the measuring rod,
i.e., it is the units in terms of which the values of other goods and services are measured
in money terms and expressed accordingly. Different goods produced in the country are
measured in different units like cloth m metres, milk in litres and sugar in kilograms.
3. Money as the Standard of Deferred Payments:
 Deferred payments are payments which are made some time in the future. Debts are
usually expressed in terms of the money of account. Loans are taken and repaid in terms
of money.
The use of money as the standard of deterred or delayed payments immensely simplifies
borrowing and lending operations because money generally maintains a constant value
through time. Thus, money facilitates the formation of capital markets and the work of
financial intermediaries like Stock Exchange, Investment Trust and Banks. Money is the
link which connects the values of today with those of the future.
4. Money as a Store of Value:
Wealth can be stored in terms of money for future. It serves as a store value of goods in
liquid form. By spending it, we can get any commodity in future. Keynes places great
emphasis on this function of money. Holding money is equivalent to keeping a reserve of
liquid assets because it can be easily converted into other things.
Scenario:
When you put \$100dollar sign, 100 in a savings account, the real value of that \$100dollar
sign, 100 is what you can buy with it. Therefore the real value of what you earn in interest
is what you can buy with that interest. When there is inflation, the purchasing power of the
interest you earn decreases. Your real interest is the nominal interest rate (the interest
you get paid) minus the rate of inflation (the loss of purchasing power)

VII. GENERALIZATION
The student was able to define Money as a commodity and its essential functions in the
economy. This will pave the way to appreciate its importance and make use of the learning
to contribute to the stability of the Philippine financial system.

VIII. ACTIVITY/EVALUATION:
In Word file, please answer the following to be uploaded in our Google Drive:
1. Describe briefly the importance of money in the economy.
2. Choose one function of money and how will you relate it with your everyday financial
activities.
IX. REINFORCEMENT
In Word file, please answer the following to be uploaded in our Google Drive:
1. Share a scenario where money is used as a medium of exchange.
2. Share a scenario where money is used as a unit of account.
3. Share a scenario where money is used as a store of value
4. Share a scenario where money is used as standard of deferred payment

Reference:
https://courses.lumenlearning.com/boundless-economics/chapter/introducing
money/#:~:text=and%20silver%20coins.,Functions%20of%20Money,as%20a%20mediu
m%20of%20exchange.

____________________________NOTHING FOLLOWS________________________
 I. COURSE CODE AND TITLE:
FINP 4 - MONETARY POLICY AND CENTRAL BANKING

II. LESSON NUMBER: 4 (Week 4)

III. TOPIC:
MODULE II: FINANCIAL CLAIMS
A. Interest rates (nominal vis-à-vis real)
Interest rates affect everyone from consumers to businesses to entire nations. They
are a tool of monetary policy set by central banks and used as a benchmark for
business and consumer borrowing. The differences between nominal and real rates
are important when it comes to loans. Simply put, interest rates effectively reveal
the true return that will be posted by a fixed-income investment and the true cost of
borrowing for individuals or businesses.

IV. LEARNING OBJECTIVES:

At the end of this lesson, the student should be able to:
1. Explain the impact of interest rates and its volatility in the financial environment
2. Attain understanding of interest rates as a crucial part of financial instruments
3. Draw comparison between nominal and real interest rates

V. MODULE PRE-ASSESSMENT:
1. Share your own understanding of the word Nominal interest rate
2. Share your own understanding of the word Real interest rate
3. _______ It is the rate of return which an investor or borrower will get or have to pay
in the market without any adjustment for inflation.
4. _______ An interest rate that will give the real picture of the purchasing power of the
consumer.
5. How do you differentiate nominal interest rate from real interest rate?
VI. LESSON PRESENTATION:
Interest rates are a very crucial
part of financial instruments and
the financial industry as a whole.
They help the investors and
financial managers to make the
decision in choosing the right
instruments for their needs and risk
profile. But simply analyzing the
interest rates will not suffice for
long term investments as inflation also plays a major role in that. This is the reason we
have two types of interest rate: Nominal Interest Rates and Real Interest rates.

 Nominal Interest Rates

Nominal interest rates are the rate of return which an investor or borrower will get or have
to pay in the market without any adjustment for inflation. For example Rate of interest on
bank accounts, bonds, loans, etc. all are nominal interest rates. It is really easy to
understand, for example: if you have deposited $100 in your bank account and your bank
is offering a 5% per annum interest rate, you will have $105 (100 + 0.05*100 ) in your
account by end of the year. Similarly, if you have borrowed $100 from someone and he
is charging 3% interest, you have to pay back $103 at the end of the year.
 Real Interest Rates
Nominal interest is a quite easy concept to understand. But when we see the effect of
inflation on top of that, things become more interesting. Continuing the above example,
depositing money in a bank will give us 5% interest and we will earn $5 in interest. But if
the inflation is 3% per annum, it means that goods and services which we can buy at, say
$100, we have to pay $103 now for the same amount of goods and services. So effectively,
we have earned only $2 ($5 – $3). So basically, real interest rates will give the real picture
of the purchasing power of the consumer.
VII. GENERALIZATION
The student was able to define the meaning of interest rates and differentiate nominal
from real. This involves an understanding of its impact in the financial environment and as
a crucial part of financial instruments.

VIII. ACTIVITY/EVALUATION:
In Word file, please answer the following to be uploaded in our Google Drive:
1. Describe briefly the relationship of interest rates with inflation
2. Define briefly:
a. Nominal Interest Rate
b. Real Interest Rate
3. Fill in the blanks:
a. _____ interest rate can be less than zero if inflation is more than _____ interest
rate
b. _____ interest rate will tell us the actual return we will get from the investment
after adjusting the inflation effect
 c. _____ interest rate takes monetary value into consideration

IX. REINFORCEMENT
In Word file, please answer the below assignment to be uploaded in our Google Drive:
1. Cite a scenario that differentiate nominal from real interest rates.
2. Cite a scenario where inflation affects real interest rates.

References:
https://www.likeforex.com/glossary/w/financial-claims-125262
https://opentextbc.ca/principlesofeconomics/chapter/27-1-defining-money-by-its-
functions/#:~:text=Money%20serves%20several%20functions%3A%20a,a%20standard
%20of%20deferred%20payment.
https://www.economicsdiscussion.net/money/money-meaning-and-functions-of-money-
discussed/597
https://www.educba.com/nominal-vs-real-interest-rates/
https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-
financial-sector/nominal-v-real-interest-rates-ap/a/nominal-vs-real-interest-rates

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