The Role of the Central

Bank in Determining the

Money Supply
Contents

• The money supply, its structure, and its determinants

• The general budget of the banking system.
• Factors affecting the money supply
 Role of Central Bank
To maintain internal and external monetary stability

To foster monetary, credit and exchange conditions

conducive to a balanced and sustainable growth of the
economy.
 What is Money Supply?

Money supply is the total

amount of monetary assets
available in an economy at a
specific time.

Money Supply = Currency +

Liquid Assets
Measures of Money Supply

The various types of money in the money supply are generally classified as
M’s
M0 = Currency in Circulation
MB = Money Base/Monetary Base it includes Currency in Circulation (M0)
and the Bank Reserves
M1 = Currency in Circulation + Checking Account (account that are not
included in the circulation but can be retrieved by the owner upon demand)
M2 = M1 + Savings Account and Certificate of Deposit/Time Deposit
M3 = Large Deposits + Institutional Money Market Funds + Other Larger
Liquid Assets
Central Bank’s Function on the Money Supply

• All those M’s are being determined by the

Central Bank
M0
• Bank Reports
MB
• Central Bank manages the money supply
M1
M2
M3
The General Budget of
the Banking System

Minimum Capitalization of a Bank

in the Philippines
Income Statement
Balance of Payment
Factors Affecting
Money Supply
1. Open Market Operation
2. Reserve Requirement
3. Rediscounting
4. Public’s Demand for
Cash Balance
Open Market Operation

• It is a monetary tool which involves the BSP publicly buying or

selling government securities from banks and financial institutions
in order to expand or contract the supply of money.
• By controlling the money supply, the BSP is able to exert some
influence on the prices of goods and services and achieve its low
inflation objectives.
Reserve Requirement

• It refers to the proportion of banks’ deposits and deposit substitute

liabilities that banks are required to hold as reserves.
• Reserve Money (RM)- the sum of currency in circulation and
reserves of banks which include cash in banks’ vault and reserve
balances or deposits with the BSP including banks’ balances
under the demand deposit account (DDA). The required reserves
shall be kept in the form of deposits placed in banks' DDAs with
the BSP.
Rediscounting

• It 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. Through the rediscounting facility, the BSP
also makes possible the timely delivery of credit to all productive
sectors of the economy.
• Rediscounting is one of the monetary tools of the BSP to regulate
the level of liquidity in the financial system.
Public’s Demand for Cash Balance

• Another major factor that affects legal reserves in the banking

system is the public’s desire to hold cash. There certain times of the
year when the public, as a whole, prefers to hold higher cash
balances.