PHILIPPINE

MONETARY
POLICY
MONETARY POLICY
AND ITS OBJECTIVE

Bryzelle Manrique
 MONETARY POLICY
- refers to the credit control measures adopted by
the central bank of a country. Monetary policy “as
policy employing central bank’s control of the
supply of money as an instrument for achieving
general economic policy.”
- Bangko Central ng Pilipinas (BSP) is the central
monetary authority of the Philippines
 OBJECTIVES OF MONETARY
POLICY
• Full Employment
- is an economic situation in which all available
labor resources are being used in the most
efficient way possible.
• Price Stability
- is a goal of monetary and fiscal policy aiming
to support sustainable rates of economic
activity. It is set to maintain a very low rate of
inflation or deflation.
• Economic Growth
-  is boosting of growth by stimulating aggregate
demand with low interest rates
• Balance of Payments
- is known as the balance of international
payments, is a statement of all transactions
made between entities in one country and the
rest of the world over a defined period, such as
a quarter or a year.
• Exchange Rate Stability
- is the price of a home currency expressed in
terms of any foreign currency.
• Neutrality of Money
- States that increases in the money supply change
only the nominal variables of the economy, not the
major ones, over the long term.
• Equal Income Distribution
- Income distribution is the smoothness or
equality with which income is dealt out among
members of a society. If everyone earns exactly
the same amount of money, then the income
distribution is perfectly equal
Advantages
of Monetary
Policy

Jane Virtucio
1. It can bring out the possibility of more
investments coming in and consumers spending
more.
• In an expansionary monetary policy, banks are
lowering interest rates on loans and mortgages.
Business owners would be encouraged to expand
their ventures and prices of commodities would also
be lowered, so consumers will have more reasons to
purchase more goods.
 
2. It allows for the imposition   of quantitative
easing byforthe
2. It allows Central
the imposition Bank easing by the Central Bank
of quantitative

• The Federal Reserve can make use of a

monetary policy to create or print more money,
allowing them to purchase government bonds
from banks and resulting to increased
monetary base and cash reserves in banks.
3. It can
3. It can lead
lead to lower
to lower rates ofrates of mortgage
mortgage payments.
payments.
• As monetary policy would lower interest
rates, it would also mean lower payments
home owners would be required for the
mortgage of their houses.
 4. It can promote low inflation rates.
4. It can promote low inflation rates.

• Monetary policy can help promote stable

prices, which are very helpful in ensuring
inflation rates will stay low throughout the
country and even the world.
5. It promotes transparency and predictability.
•A monetary policy would oblige
policymakers to make announcements that
are believable to consumers and business
owners in terms of the type of policy to be
expected in the future.
6. It promotes
6. Itpolitical freedom.
promotes political freedom.
•  As central bank can operate separately from the
government, this will allow them to make the best
decisions based upon how the economy is performing
doing at a certain point in time.
• Banks would operate based on hard facts and data,
rather than the wants and needs of certain individuals.
Even the Federal Reserve can operate without being
exposed to political influences.
LIMITATION OF MONETARY POLICY

Kernjit Singh
 Economic Forecasting

• Prediction of future business activity

and consumer spending is difficult.
• Incorrect forecast can lead to incorrect
policies
 Time Lags
• Collecting and studying data takes months
• Discussion of data and agreement on policy is
time consuming
• Months pass before effects of policy is felt
(ultimately, things may change during this time)
 Priorities and Trade-offs

• Some policies may remedy one problem and

make another worse.

Example:
Easy money= no recession, high inflation
Tight money= recession, no inflation
 Lack of Coordination
• some government agencies may
have different goals and it sends
mixed signals to the market
 Conflicting Opinions

• Fighting within the government

 Monetary
Banking and
Policy

Floramae Roquillas
 MONETARY POLICY
• These are measures employed by the
government to influence economic
activity, specifically by manipulating
money supply and interest rate. To
achieve certain goals, monetary
measures are frequently used in tandem
with fiscal policy to achieve certain
goals.
TOOLS OF MONETARY POLICY

• Open-market operation

• Reserve ratio

• Discount rate
 OPEN MARKET-RATIO OPERATION

• It is the buying and selling of

government bonds to
commercial banks and to the
general public. It is the most
important instrument for
influencing money supply.
 RESERVE RATIO

• This reserve ratio acts as a brake on

the lending operations of the
commercial banks. By increasing or
decreasing the reserve ratio for
lending, the central bank can
influence the amount of money
available for lending, hence the
money supply.
 DISCOUNT RATE
• The commercial banks issue a
promissory note (IOU) drawn against
itself and secured by acceptable
collateral. Just as commercial banks
charge interest on their loans to
individuals or organization, the central
bank charge interest on loans they grant
to commercial banks. This interest rate
they charge is called the discount rate.
Remember:
• Fiscal policy affects consumers by
influencing their tax bills or
providing them with government
employment. Monetary policy
affects consumers by creating a
boost in spending and changing the
interest for loan rates and credit
cards.
 Ira Faith Bombeo

BANKING
IN THE
PHILIPPIN
 Bangko Sentral ng Pilipinas (BSP)

• BSP is the central bank of the Republic of the

Philippines.
• Established on 3 July 1993 pursuant to the provisions
of the 1987 Philippine Constitution and the New
Central Bank Act of 1993. The BSP took over from
Central Bank of Philippines, which was established
on 3 January 1949, as the country’s central monetary
authority.
• The BSP enjoys fiscal and administrative autonomy
from the National Government in the pursuit of its
mandated responsibilities.
 Monetary Policy

• The primary objective of BSP's monetary

policy is to promote a low and stable
inflation conducive to a balanced and
sustainable economic growth. The
adoption of inflation targeting framework
for monetary policy in January 2002 is
aimed at achieving this objective.
 Monetary Operations
• Monetary operations refer to the buying/selling
of government securities, lending/borrowing
against underlying assets as collateral,
acceptance of fixed-term deposits, foreign
exchange swaps, and the use of other
monetary instruments of the Bangko Sentral
aimed at influencing the underlying demand
and supply conditions for central bank money.
 Currency Management
• The BSP has the exclusive power and
authority to issue the national currency.
BSP’s notes and coins are issued against,
and in amounts not exceeding, the assets
of the BSP. All notes and coins issued by
the BSP are fully guaranteed by the
government and are considered legal
tender for all private and public debts.
International Reserves Management

• The BSP maintains a healthy level

of international reserves to
provide liquidity support in times
of volatility in the exchange rate
and balance of payments.
 Vision
• The BSP aims to be recognized globally
as the monetary authority and primary
financial system supervisor that supports
a strong economy and promotes a high
quality of life for all Filipinos.
 Mission
• To promote and maintain price stability, a
strong financial system, and a safe and
efficient payments and settlements
system conducive to a sustainable and
inclusive growth of the economy.
 Fiscal Functions

Fritzie Corvera
The Four Major Fiscal Functions

 Allocation
 Distribution
 Stabilization
 Development
 Allocation
• It is a process by which total resource use is divided between private and
social goods and which the mix of social good is chosen.

Social or public Merit Private Goods

Goods (nat’l defense, Goods (coke, T-shirt/
System justice, (roads, bridges,
power, water, Clothing, TV sets)
Mosquito) education)

• In the performance of allocation function, fiscal policy is expected to

regulate the balance in making available both private goods, merit goods
and social goods. The government intervenes through subsidies,
price regulation, and the direct provision of social goods.
 Distribution
 The distribution of income and wealth is shaped by
the distribution of the factors of production.

 Fiscal policy is directed toward correcting this income

and wealth.

Ex. High tax for rich, and low tax for poor, favorable
public policies on agrarian reform, wages, labor and
employment among others.
 Stabilization
Instability may be due to charges in prices of major imports, cost
of foreign borrowings, and the availability of foreign borrowings
which lead to deficits in the budget and balance of payments and
trade.

Using expenditure and tax policies for stabilization in developing

countries may be more difficult. An increase in expenditures may
entail either additional taxes or more borrowing. The low tax base
and inefficient tax administration makes a case of public borrowing.
A country aspiring to achieve growth and development may have
to experience instabilities and suffer chronic balance of payments
deficit, severe inflation, high levels of unemployment and
underemployment and the like.
 Development
Development is an expensive endeavor. For it to be achieved by
developing countries, a radical shift in revenue and expenditure
priorities is called for.
• Human Development- process of enlarging the range of people’s
choices; increasing opportunities for education, health care, income
and employment, and covering the full range of human choices from a
sound physical environment and political freedom.

• Sustainable Development- is a process of change in which

exploitation of resources, the direction of investments, the orientation
of technological development, and institutional change are made
consistent with future as the presents needs.
 Fiscal Policy
Iresh Palabrica

• Changes in the level of government spending and taxation

aim at either increasing or decreasing the level of
aggregate demand in the economy to promote the
macroeconomic objectives.
• One of the tools the government used to monitor and
manage the economy.
 3 Types of Fiscal Policy

1. Neutral Fiscal Policy- neutral effect in economy.

2. Expansionary fiscal policy- the government is increasing in
government spending and reducing taxation in an attempt to
increase their money available economy.
3. Contradictionary Fiscal policy- when the government increases
taxation and reduces government spending in an attempt to reduce
money in the economy and a result of inflation.
Effects on Fiscal Policy

• Unemployment

• Expansion

• Contraction

• Inflation issue
 Conclusion

• Keep inflation under control

• Improving social indicators

• Maintain fiscal prudence by

making fiscal deficit low

• Growth momentum
Coordinating
Fiscal and
Monetary
Policy

Je-ann Lagra
Why is there a need to coordinate monetary and fiscal
policies?
Achieving a sustainable economic growth in context of viable
external accounts and price stability is the foremost objective of
macroeconomic policy.
Financial Instability could ensue if there is no efficient policy
coordination that can lead to:
High interest rates
Exchange rate pressures
Rapid inflation
Adverse impact on economic growth
It requires an extensive coordination between the respected authorities of fiscal
and monetary policy to ensure an effective implementation.
It will result in inferior overall economic performance if there is lack of coordination
between the monetary and fiscal authorities.

Structural Reform and Liberalization of the Financial Sector

A supportive fiscal policy that provides macroeconomic stability, fiscal discipline,

and avoidance of taxes that discriminate against financial activity can only
proceed within the framework.
 If high fiscal deficits persists while the authorities are undertaking the reform of

the financial sector, interest rates could reach very high levels or, if interest
rates are kept at artificially low levels, either inflation would surge or the
demand for credit and distortions in resource allocations would grow
significantly.
The Effect of Coordinating Monetary
and Fiscal Policy
Both are macroeconomic tools that are used to
stimulate and manage the economy
Together have great influence over a nation’s
economy, it’s consumers, and its businesses.
Both have direct and indirect impacts on
household and personal finances
 Phases in the Development of
Coordination Process
The auctioning of short-term marketable
In the early stage of development - government securities often serves as
central banks tend to finance fiscal starting point for money market
deficits almost entirely development (under broad money
programming)

When domestic financial market was fully

developed;
As the domestic financial market
• Interest rates are completely flexible
starts to develop, there is a greater
• The market ensures the liquidity of public
flexibility in the determination of
debt instruments
interest rates
• The central bank manages liquidity at its
own initiatives
Eljhon Hart Gonzales Pauline Navarro
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