Monetary Theories and Policies

September 6, 2019.

1

Keywords
Fiscal Policy
•the use of government spending
and taxation to influence the economy.
•When the government decides on the goods
and services it purchases, the transfer
payments it distributes, or the taxes it
collects, it is engaging in fiscal policy.
Monetary Policy
•refers to changes made by a central bank to
interest rates and/or the quantity of money in
order to achieve changes in aggregate
demand that keep inflation within its target
range
•measures or actions taken by the central
bank to influence the general price level and
the level of liquidity in the economy.
Open market operations
•The sale and purchase of
government securities and treasury
bills/bonds by the BSP to withdraw
liquidity from or inject liquidity into
the system
•Its objective is to regulate the
money supply in the economy.
Reserve Requirement – refers to the
proportion of banks’ deposits and
deposit substitute liabilities that
banks are
•Monetary required– atomeasure
aggregates hold asof the
reserves
amount of money in circulation within a
country
•Discount Rate -the rate of interest that a
country's central bank charges for lending money to
other banks
•Consumer Price Index (CPI) – represents the
average price for a given period of a standard basket
of goods and services consumed by a typical Filipino
family.
temper - to temper something means to make it
less extreme
2
Monetary Theory
The advent of money as a medium of exchange replaced the need for
exchange through barter and enabled producers and factor owners to
specialise and sell their output for money.
The money earned could then be used to trade with other producers
and factor owners. It is clear that the evolution of money as a medium
of exchange, and as a store of wealth, had a considerable impact on the
development of modern economic commerce, international trade, and
global prosperity.
In modern economies, notes and coins represent only a small fraction of
the total money supply, with most money being in the form of digital
bank accounts.

3
Monetary Policy

Goals Targets
 Low unemployment rate  Monetary aggregates
 Low inflation rate  Interest rates
 Financial market stability

4
BSP Monetary Policy
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 main
objective of stabilizing the price level.
Expansionary Monetary Policy
Monetary policy setting that intends to
increase the level of liquidity/money
supply in the economy and which could
also result in a relatively higher
inflation path for the economy.
Examples are the lowering of policy interest
rates and the reduction in reserve
requirements.
Expansionary monetary policy tends to
encourage economic activity as more
funds are made available for lending
by banks.
This, in turn, increases aggregate demand
which could eventually fuel inflation
pressures in the domestic economy.
Contractionary Monetary Policy
Monetary policy setting that intends to
decrease the level of liquidity/money
supply in the economy and which could
also result in a relatively lower inflation
path for the economy.
Examples of this are increases in policy
interest rates and reserve
requirements.
Contractionary monetary policy tends to
limit economic activity as less funds are
made available for lending by banks.
This, in turn, lowers aggregate demand
which could eventually temper inflation
pressures in the domestic economy.
5

•The Philippines’ inflation was
3.2 percent in May 2019
Interest rates and monetary
transmission mechanisms
•Policy-makers in different countries
may have different mandates for the
implementation of monetary policy.
•For example, in the UK there has a
single mandate – to stabilise the price
level at an inflation rate of 2%.
6
7
Group Activity
Case Study

Each group will choose a monetary policy decision of the BSP (on a yearly basis).
Please refer to http://www.bsp.gov.ph/monetary/monetary.asp

Criteria (Base 60%)

1. Problem Identification (5%) ( The monetary policy decision)
2. Presentation of possible solution (10%) (The effect of the monetary policy decision to
money supply, interest rate, investment, reserve requirement, and aggregate
demand)
3. Evaluation of possible solution (20%) (Evidence to support the possible solution)
4. Conclusion (5%)
Total 100%

8
References
Monetary Economics by Handa, J. , 2nd edition
https://www.economicsonline.co.uk/
https://psa.gov.ph/statistics/survey/price/summary-inflation-report-
https://www.econlib.org/library/Enc/FiscalPolicy.html
The Economic Times
http://www.bsp.gov.ph/monetary/glossary