MONETARY

POLICY
 What Is Monetary Policy?
◈ Monetary policy is a set of
tools used by a nation's
central bank to:
- control the overall money
supply
- promote economic growth

2
◈ Monetary policy is
commonly classified as
either expansionary or
contractionary.

3
◈ In the Philippines, the Central Bank of the
Philippines implements monetary policy.
4
Understanding
Monetary Policy

5
◈ Monetary policy is the control of the quantity of

“
money available in an economy and the channels by
which new money is supplied.

Economic statistics such as gross domestic product

(GDP), the rate of inflation, and industry and
sector-specific growth rates influence monetary policy
strategy.

6
Goals of Monetary Policy
◈ 1. Control Inflation
◈ 2. Control Unemployment
◈ 3. Influence Exchange Rates

7
Tools of Monetary Policy
1. Open Market Operations
In open market operations (OMO), the Central Bank buys
bonds from investors or sells additional bonds to investors to
change the number of outstanding government securities and
money available to the economy as a whole.
The objective of OMOs is to adjust the level of commercial
bank’s reserve balances.
  8
Tools of Monetary Policy
2. Interest Rates
The central bank may change the interest rates or the
required collateral that it demands. Banks will loan more
or less freely depending on this interest rate.

9
Tools of Monetary Policy
3. Reserve Requirements
Reserve requirements are the amount of funds that a
bank holds in reserve to ensure that it is able to meet
liabilities in case of sudden withdrawals.
Central Banks can manipulate the reserve requirements,
the funds that banks must retain as a proportion of the
deposits made by their customers to ensure that they
can meet their liabilities. 10
Tools of Monetary Policy
3. Reserve Requirements

Lowering this reserve requirement releases more capital

for the banks to offer loans or buy other assets.
Increasing the requirement curtails bank lending and
slows growth.

11
Types of Monetary
Policy

12
Monetary policies are seen as
either expansionary or
contractionary depending on
the level of growth or
stagnation within the economy.

13
Contractionary Monetary Policy
A contractionary monetary policy is a type of monetary policy
that is intended to reduce the rate of monetary expansion to
fight inflation, a primary indicator of an overheated economy,
which can be the result of extended periods of economic
growth. The policy reduces the money supply in the economy.
The central bank usually sets a target for the inflation rate and
uses the contractionary monetary policy to meet the target.

14
Tools for a Contractionary Monetary
Policy

15
1. Increase the short-term interest rate (discount
rate)
In order to reduce The increase in A contractionary
the money supply, interest rates will policy increases
the central bank also affect interest rates and
can opt to increase consumers and limits the
the cost of short- businesses in the outstanding money
term debt by economy as supply to slow
increasing the commercial banks growth and
short-term interest will raise the decrease inflation.
rate. interest rates they
charge their clients.
16
2. Raise the reserve requirements

Commercial banks are obliged

to hold the minimum amount of
reserves with the central bank
and a bank’s vault. A rise in the
required reserve amount would
decrease the money supply in
the economy.

17
3. Expand open market operations (sell
securities)
The central bank is involved in
open market operations by
selling and purchasing
government-issued securities.
The central bank can reduce the
money circulated in the
economy by selling large
portions of the government
securities (e.g., government
bonds) to investors. 18
 Effects of a Contractionary Monetary
A
Policy
contractionary
monetary
policy may
result in some
broad effects 2. Slow down
on an 1. Reduced 3. Increased
economic
economy. The inflation unemployment
following growth
effects are the
most
common:

19
1.
Reduced The inflation level is the main
inflation target of a contractionary
monetary policy. By reducing
the money supply in the
economy, policymakers are
looking to reduce inflation and
stabilize the prices in the
economy. 20
2. Slow Reducing the money supply
down usually slows down economic
economic growth. As the money supply in
growth the economy decreases,
individuals and businesses
generally halt major
investments and capital
expenditures, and companies
slow down their production. 21
 An unwanted side effect of a
3. Increased
unemployment contractionary monetary policy
is a rise in unemployment. The
economic slowdown and lower
production cause companies to
hire fewer employees.
Therefore, unemployment in the
economy increases.
22
Expansionary Monetary Policy

Expansionary monetary policy is when a central bank uses

its tools to stimulate the economy. That increases the money
supply, lowers interest rates, and increases demand. It boosts
economic growth.

23
 Tools for an Expansionary Monetary
Policy

Open Open Open

Market Market Market
Operations Operations Operations

24
1.Open
Market
Purchasing Treasuries from
Operations banks increases their reserves,
which makes it easier for them
to lend out money to
customers, making it easier for
people to buy homes, cars, etc,
and businesses to start or
expand. 25
2.Slow When interest rates are already high,
down the central bank focuses on lowering
the discount rate. The discount rate is
economic the interest rate that banks can
growth borrow money from the Central Bank
Reserve. When the interest rate drops,
it becomes cheaper for banks to
maintain their reserves, giving them
more money to lend. As a result,
banks can lower the interest rates they
charge their customers. 26
2.Slow
down
The lower the discount rate, the fewer
economic financing costs for a bank, therefore,
growth money is cheaper. When the discount rate
is lowered, banks will lower the interest
rate they charge customers for borrowing
money as well.

27
3.Reduce
Reserve requirements are the
Reserve
Requirement amount of reserves that banks
are required to keep on hand as
stipulated by a central bank.
The fewer reserves they are
required to keep, the more
money they can lend out.

28