MONETARY POLICY

Subdecks (1)

Cards (137)

  • Fiscal Policy
    Set of measures or actions to effect changes in government expenditures and tax revenue to achieve full employment and non-inflationary output
  • Monetary Policy
    Set of measures or actions taken by the central bank to affect the money supply and credit to achieve price stability, full employment, and economic growth
  • Targeting approaches for Monetary Policy
    • Interest rate targeting
    • Monetary aggregate targeting
    • Foreign exchange targeting
    • Inflation targeting
  • Monetary instruments used to effect Monetary Policy

    • Open market operations
    • Discount rate changes
    • Reserve requirement ratio changes
  • Effects of Monetary Policy instruments
    • Bank reserves, money supply, credit availability
    • Interest rates, borrowing
    • Security prices, and foreign exchange
  • Objectives of Monetary Policy
    • Price stability
    • Economic growth
    • Low inflation
    • Full employment
    • Sustainable pattern of trade (domestic and international)
  • Central Bank
    The central monetary authority that regulates banks, quasi-banks and non-financial institutions that perform similar functions of banks. It is the authority that gives direction on the areas of money, credit, and banks. Its main role is to control the money supply of the nation.
  • Functions of Central Banks
    • Issuer of currency and manager of foreign reserves
    • Banker to the government
    • Banker to domestic commercial bank
    • Regulator of domestic financial institutions
    • Operator of monetary and credit policy
  • In 2009, using alternative autonomy indexes, the International Monetary fund study reported a global trend toward relatively higher level of central bank autonomy
  • Major trends in central bank autonomy
    • Shifting in banking institutions from currency boards to single state central banks or currency unions (supranational central banks)
    • Most central banks have been granted the responsibility to set price stability or target inflation as one of their objectives of monetary policy. Also, most of these countries also have autonomy with respect to setting the policy rate as it concerns the government.
    • Divergence among central banks on the issue of financial supervision. Many central banks in developing countries have retained their supervisory role. But the priority of central banks is achieving medium-term price stability.
    • Participation in currency union (or supranational central banks) has enhanced the autonomy of central banks in both developed and developing countries.
  • Assets of Central Bank Balance Sheet
    • Securities- government securities purchased by the central bank usually consists of treasury bills, notes, and bonds
    • Loans to commercial banks – it is listed as claims against the commercial banks
  • Liabilities and net worth of Central Bank Balance Sheet
    • Reserves of commercial banks- It is a reserve requirement of the central bank to commercial banks against their checkable deposits
    • Treasury deposits- the government treasury department deposits at the central bank and draws checks on them
    • Currency circulating in the economy. Notes(bills) and coins constitute claims against the assets of the central banks
  • In the Philippines, it is the Bangko Sentral ng Pilipinas created through Republic Act 7653, known as the New Central Bank Act
  • Bangko Sentral ng Pilipinas
    The central monetary authority that functions and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking, and credit. Its primary objective is to maintain price stability and also promote and maintain monetary stability and the convertibility of the peso.
  • The Central Bank of the Philippines was created
    1948
  • The Central Bank of the Philippines created in 1948 is replaced by Bangko Sentral ng Pilipinas

    1993
  • Monetary Policy: Targeting approaches
    1. Interest rate targeting approach - stabilize cost of borrowings for investment
    2. Monetary aggregate targeting approach - indirectly controls general price level by controlling money supply
    3. Foreign exchange targeting approach - stability of the convertibility of currency
    4. Inflation targeting approach - directly controls inflation rate to achieve price stability
  • Monetary Aggregate Targeting and Interest Rate Targeting

    • Monetary Aggregate Targeting: Target money supply can lead to periods of relatively high volatility of interest rates
    • Interest Rate Targeting: Central bank can maintain target interest rate by adjusting money supply, but money supply must be allowed to fluctuate relatively freely
  • Exchange Rate Targeting
    • - Setting a fixed level or band of values for the exchange rate against a major currency
    • Central bank supports the target by buying and selling the national currency in foreign exchange markets
    • Ties the domestic economy's currency to that of a low-inflation economy to import the low inflation experience
    • If domestic inflation rises above the target, central bank sells foreign currency reserves and buys domestic currency to prevent currency depreciation
  • Inflation Targeting

    • - Primarily to maintain price stability
    • Also aims to smoothen business cycle, maintain high employment, and achieve strong economic growth
    • Involves setting an inflation target and undertaking monetary policy to achieve it
    • Central bank explains how each monetary action fits within the overall strategy, and explains if the target is missed
  • Philippines Monetary Policy Targeting Approach
  • Inflation target
    The desired inflation rate that policymakers commit to achieve over the policy horizon
  • Inflation target setting
    1. The national government sets the inflation target two years in advance in consultation with the BSP through the Development Budget Coordinating Committee
    2. BSP announces the inflation target
  • Inflation forecast

    The expectation or prediction of the inflation rate over the policy horizon, given current and available data
  • Inflation forecast can change over time because of new information coming in the assessment of future inflation
  • Inflation forecast is a major factor considered when deciding on whether monetary instruments should be adjusted to attain inflation target
  • Headline inflation
    The rate of change in the average prices of goods and services purchased by consumers, measured as the annual percentage change in the Consumer Price Index (CPI)
  • Core inflation
    A measure of the change in average consumer prices after excluding from the CPI items which have volatile price movements like foods and energy
  • Core inflation

    • It is used to measure the underlying trend or movement in the average consumer prices
    • It excludes the changes in the price levels of commodities caused by short-live shocks or disturbances independent from economic and monetary policy
  • Methods of measuring core inflation
    • Exclusion method
    • Trimmed mean
    • Weighted mean
    • Econometric techniques
  • CPI inflation is volatile or changes anytime and influenced by factors beyond the control of economic policy
  • Core inflation measurement shows if the price movements are caused by temporary disturbances or by permanent price trend which are necessary in the formulation of economic and monetary policy
  • Demand-pull inflation

    Inflation caused by an excess of total spending beyond the economy's capacity to produce
  • Cost-push inflation
    Inflation arising from the cost side of the economy, caused by rising per-unit production costs
  • Cost-push inflation
    Abrupt and unexpected rises in key resource prices can push up overall production costs, causing firms to produce less output and unemployment to go up
  • Demand-pull inflation
    Low levels of inflation reduce real output because inflation diverts time and effort toward activities designed to hedge against inflation
  • Inflationary gap
    The amount by which the economy's aggregate expenditures at the full-employment GDP exceed those just necessary to achieve the full-employment GDP
  • Deflation
    A sustained reduction in the general price level of prices, accompanied by declines in output and employment
  • Deflationary gap
    A state of the economy in which there are unemployment resources but no inflationary pressure
  • Disinflation
    The elimination or reduction of inflation