Monetary Policy

Monetary policy

 is the monitoring and control of money supply by a central bank, such as the Federal
Reserve Board in the United States of America, and the Bangko Sentral ng Pilipinas in
the Philippines.
 This is used by the government to be able to control inflation, and stabilize currency.
 Monetary Policy is considered to be one of the two ways that the government can
influence the economy - the other one being Fiscal Policy (which makes use of
government spending, and taxes).
 Monetary Policy is generally the process by which the central bank, or government
controls the supply and availability of money, the cost of money, and the rate of interest.
Types of Monetary Policy
INFLATION TARGETING

 This revolves around meeting publicly announced, preset rates of inflation. The standard
used is typically a price index of a basket of consumer goods, such as the Consumer
Price Index (CPI) in the United States.
 It intends to bring actual inflation to their desired numbers by bringing about changes in
interest rates, open market operations, and other monetary tools.
PRICE LEVEL TARGETING

 This involves keeping overall price levels stable or meeting a predetermined price level.
 Similar to inflation targeting, the central bank alters interest rates to be able to keep the
index level constant throughout the years.
 Flourishing and advanced economies opt not to use this method as it is generally
perceived to be risky and uncertain.
MONETARY AGGREGATES

 This approach focuses on controlling monetary quantities.

 Once monetary aggregates grow too rapidly, central banks might be triggered to
increase interest rates, because of the fear of inflation.
FIXED EXCHANGE RATE

 This is also often called "Pegged Exchange Rate".

 Here, a currency's value is pegged to the value of a single currency, or to a basket of
other currencies or measure of value, such as gold.
 The focus of this monetary system is to maintain a nation's currency within a narrow
band.
GOLD STANDARD

 In Gold Standard, the government allows its currency to be converted into fixed amounts
of gold, and vice versa.
  This may be regarded as a special kind of Fixed Rate Exchange policy, or of Price Level
Targeting.
 This monetary policy is considered flawed because of the need for large gold reserves of
countries to keep up with the demand and supply for money.
 It is no longer used in any country, though it was widely used in the mid-19th century
through 1971.
Monetary Policy Instruments
OPEN MARKET OPERATIONS

 consist of repurchase and reverse repurchase transactions, outright transactions, and

foreign exchange swaps.
Repurchase and Reverse Repurchase

 This is carried out through the Repurchase Facility and Reverse Purchase Facility of the
Bangko Sentral ng Pilipinas.
 In Purchase transactions, the Bangko Sentral buys government securities with a
dedication to sell it back at a specified future date, and at a predetermined interest rate.
 The BSP's payment increases reserve balances and expands the monetary supply in the
Philippines.
 On the other hand, in Reverse Repurchase, the government acts as the seller, and
works to decrease the liquidity of money.
 These transactions usually have maturities ranging from overnight to one month.
Acceptance of Fixed-Term Deposits

 To expand its liquidity management, the Bangko Sentral introduced this method in 1998.
 In the Special Deposits Account, or SDA, consists fixed terms deposits by banks and
institutions affiliated with the BSP.
Standing Facilities

 To increase the volume of credit in the financial system, the Bangko Sentral ng Pilipinas
extends loans, discounts, and advances to banking institutions.
 "Rediscounting is a standing credit facility provided by the BSP to help banks meet
temporary liquidity needs by refinancing the loans they extend to their clients."
 There are two types of rediscounting in the BSP: the peso rediscounting facility and
the Exporter's dollar and Yen Rediscount Facility.
Reserve Requirements

 In banking institutions, there are required amounts that banks cannot lend out to people.
 They always need to maintain a certain balance of money, which are called "reserves".
 Once these reserve requirements are changed and are varied, changes in the monetary
supply will be observed greatly.
Open Market Operations
Outright Transactions
  Unlike the repurchase or reverse repurchase, there is no clear intent by the government
to reverse the action of their selling/buying of monetary securities.
 Thus, this transaction creates a more permanent effect on our monetary supply.
 "When the BSP buys securities, it pays for them by directly crediting its counterparty's
Demand Deposit Account with the BSP."
 The reverse is done upon the selling of securities.
Foreign Exchange Swaps

 This refers to the actual exchange of two currencies at a specific date, at a rate agreed
upon the deal date and the reverse exchange of the currencies at a farther ate in the
future, also at an interest rate agreed on deal date.
Fiscal Policy
Fiscal policy

 refers to the "measures employed by governments to stabilize the economy, specifically

by manipulating the levels and allocations of taxes and government expenditures.
 Fiscal measures are frequently used in tandem with monetary policy to achieve certain
goals."
 In the Philippines, this is characterized by continuous and increasing levels of debt and
budget deficits, though there have been improvements in the last few years.
 The Philippine government's main source of revenue are taxes, with some non-tax
revenue also being collected.
 To finance fiscal deficit and debt, the Philippines relies on both domestic and external
sources.
Revenues and Funding

 The Philippine government generates revenues mainly through personal and income tax
collection, but a small portion of non-tax revenue is also collected through fees and
licenses, privatization proceeds and income from other government operations and
state-owned enterprises.
Tax Revenue

 Tax collections comprise the biggest percentage of revenue collected.

 Its biggest contributor is the Bureau of Internal Revenue (BIR), followed by the Bureau
of Customs (BOC).
 Tax effort as a percentage of GDP has averaged at roughly 13% for the years 2001-
2010.
Income Taxes

 Income tax is a tax on a person's income, wages, profits arising from property, practice
of profession, conduct of trade or business or any stipulated in the National Internal
Revenue Code of 1997 (NIRC), less any deductions granted.
 Income tax in the Philippines is a progressive tax, as people with higher incomes pay
more than people with lower incomes.
E-VAT

 The Expanded Value Added Tax (E-VAT), is a form of sales tax that is imposed on the
sale of goods and services and on the import of goods into the Philippines.
 It is a consumption tax (those who consume more are taxed more) and an indirect tax,
which can be passed on to the buyer.
 The current E-VAT rate is 12% of transactions. Some items which are subject to E-VAT
include petroleum, natural gases, indigenous fuels, coals, medical services, legal
services, electricity, non- basic commodities, clothing, non-food agricultural products,
domestic travel by air and sea.
Tariffs and Duties

 Second to the BIR in terms of revenue collection, the Bureau of Customs (BOC)
imposes tariffs and duties on all items imported into the Philippines.
 According to Executive Order 206, returning residents, Overseas Filipino Workers
(OFW's) and former Filipino citizens are exempted from paying duties and tariffs.
Non-Tax Revenue

 Non-tax revenue makes up a small percentage of total government revenue (roughly

less than 20%), and consists of collections of fees and licenses, privatization proceeds
and income from other state enterprises.
The Bureau of Treasury

 The Bureau of Treasury (BTr) manages the finances of the government, by attempting
to maximize revenue collected and minimize spending.
 The bulk of non-tax revenues comes from the BTr's income.
 Under Executive Order No.449, the BTr collects revenue by issuing, servicing and
redeeming government securities, and by controlling the Securities Stabilization Fund
(which increases the liquidity and stabilizes the value of government securities) through
the purchase and sale of government bills and bonds.
Privatization

 Privatization in the Philippines occurred in three waves: The first wave in 1986-1987,
the second during 1990 and the third stage, which is presently taking place.
 The government's Privatization Program is handled by the inter-agency Privatization
Council and the Privatization and Management Office, a sub-branch of the Department
of Finance.
PAGCOR

 The Philippine Amusement and Gaming Corporation (PAGCOR) is a government-

owned corporation established in 1977 to stop illegal casino operations.
 PAGCOR is mandated to regulate and license gambling (particularly in casinos),
generate revenues for the Philippine government through its own casinos and promote
tourism in the country.
 Fiscal policy during the Marcos administration was primarily focused on indirect tax
collection and on government spending on economic services and infrastructure
development.

 The first Aquino administration inherited a large fiscal deficit from the previous
administration but managed to reduce fiscal imbalance and improve tax collection
through the introduction of the 1986 Tax Reform Program and the value added tax.

 The Ramos administration experienced budget surpluses due to substantial gains from
the massive sale of government assets and strong foreign investment in its early years.

 However, the implementation of the 1997 Comprehensive Tax Reform Program and the
onset of the Asian financial crisis resulted to a deteriorating fiscal position in the
succeeding years and administrations.

 The Estrada administration faced a large fiscal deficit due to the decrease in tax effort
and the repayment of the Ramos administration's debt to contractors and suppliers.

 During the Arroyo administration, the Expanded Value Added Tax Law was enacted,
national debt-to-GDP ratio peaked, and underspending on public infrastructure and other
capital expenditures was observed.