Economic Policies in the Philippines

Economic Policy is

• the actions that governments take in the economic field. • It covers the systems for setting levels of taxation,

government budgets, the money supply and interest rates as well as the labor market, national ownership, and many other areas of government interventions into the economy

Objectives

The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency

Responsibilities

• The BSP provides policy directions in the areas of money, banking and credit. It supervises operations of banks and exercises regulatory powers over non-bank financial institutions with quasi-banking functions.

Under the New Central Bank Act, the BSP performs the following functions, all of which relate to its status as the

Republic’s central monetary authority.

Liquidity Management. The BSP formulates and implements monetary policy aimed at influencing money supply consistent with its primary objective to maintain price stability. 

Currency issue. The BSP has the exclusive power to issue the national currency. 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. 

Lender of last resort. The BSP extends discounts, loans and advances to banking institutions for liquidity purposes. 

Financial Supervision. The BSP supervises banks and exercises regulatory powers over non-bank institutions performing quasi-banking functions. 

Management of foreign currency reserves. The BSP seeks to maintain sufficient international reserves to meet any foreseeable net demands for foreign currencies in order to preserve the international stability and convertibility of the Philippine peso.

Determination of exchange rate policy. The BSP determines the exchange rate policy of the Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy such that the role of Bangko Sentral is principally to ensure orderly conditions in the market. 

Other activities. The BSP functions as the banker, financial advisor and official depository of the Government, its political subdivisions and instrumentalities and government-owned and -controlled corporations.

TERMS

DEFINE THE FOLLOWING

INTEREST

money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt

INTEREST RATE

the proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding

DISCOUNT RATE

a rate used for discounting bills of exchange

REDISCOUNT RATE

• the discount rate charged by Federal Reserve banks for rediscounting commercial paper for member banks or making secured advances to them on their own notes.

INVESTMENTS

• the action or process of investing money for profit or material result

DEMAND DEPOSIT

• a deposit of money that can be withdrawn without prior notice.

LETTER OF CREDIT

• a letter issued by a bank to another bank (typically in a different country) to serve as a guarantee for payments made to a specified person under specified conditions

IMPORT

• bring (goods or services) into a country from abroad for sale

EXPORT

• send (goods or services) to another country for sale.

BALANCE OF PAYMENTS

• the difference in total value between payments into and out of a country over a period

TIGHT MONEY

• money or financing that is available only at high rates of interest

EASY MONEY

• money obtained by dubious means or for little work.• money available at relatively low interest

The Significance of Money

What is Money?

Hyman

Money is “ anything that is generally accepted as payment for goods or services”

Cargill

Money is “ anything that is used as payment, for a good, a service or a debt obligation”.

Kidwell and Peterson

Money is “a generally acceptable medium of exchange”.

Functions of Money

As unit of account

As medium of exchange

As a store of wealth

The Evolution of Money

Payment system

The method of conducting transactions in the economy.

Objects used as Money

Dentalia, used as the payment system of the American Indians for 2,500 years

Wool Blankets

Used by the Northwest Indian

Territory as a medium of exchange

Knives, Rice and Spades

Used in China around 3000B.C

Cattle and Clay Tablets

Used in Babylonia

around 2,500 B.C

Wampum and Beaver Fur

Used by the American

Indians of the Northeast

In A.D 1500

Tobacco

Used by the early American

colonist in around 1650’s

Whales’ Teeth

Used by the Pacific people on the Island of Fiji

Disadvantages of Using Objects as Money

Objects are

perishable

Objects are

indivisible.

Objects are not easily

portable.

The Use of Precious Metals

Silver and Gold

Used at around 2000BC

As late as 1933,Gold coins were still used in the United States

Lydian coins are made of

electrum.Used at around 7th century BC

Etruscann coinUsed at around

553 BC

Philippines used gold coins as a

medium of exchange until 14th century.

Disadvantage of using Precious Metals

Their monetary or exchange value

Intrinsic Value

Fiat Money

Refers to paper currency decreed by the government as legal tender but not

convertible to coins or other precious metals.

Credit Money

Money that is backed by a promise to pay.Its worth as a commodity is negligible

resulting to its very little intrinsic value.

Electronic Form of Money:

A new form of Money

Measures of Money

People who are much concerned with maintaining the stable value of their money holdings will interested to know the how the money system works. One of the first concerns will be to familiar with the concepts like the measure of money.

M0: Monetary Base, the actual federal reserve notes (dollar bills) and coins in

circulation.

MB: M0 + coins and notes in bank vaults and money deposited at the Federal Reserve (this is

the most important measure).

M1: M0 + travelers checks, demand account balances.

M2: M1 + savings account balances, CD’s and money market accounts.

M3: M2 + large deposit accounts and other special Federal Reserve

quantities.

The Demand for Money

Money has become an important commodity at home and in the offices.

Transaction Demand for Money

The amount of money needed to cover the needs of an individual, firm, or nation. 

That is, transaction demand for money is a measure of how much of a certain currency people need in order to buy the goods and services they use.

Generally speaking, if an economy is healthy, there is a high transaction demand for money because people are buying more goods and services.

Conversely, if an economy is in trouble, people buy fewer goods and services.

Unless there is a significant, sudden change in the transaction demand, central banks have little trouble adjusting the money supply to accommodate the changes that do occur.

Transaction Cost

The total cost of a security transaction after commissions, taxes, and other expenses.

Factors Affecting Demand of

Money

The nominal interest rates in the economy;

The degree to which payments and receipts can be synchronized in the economy;

Expectations about future levels of interest rates;

Stock and bond prices;

Inflation;

The level of nominal GNP

The demand curve for money illustrates the quantity of money demanded at a given interest rate.

Notice that the demand curve for money is downward sloping, which means that people want to hold less of their wealth in the form of money the higher that interest rates on bonds and other alternative investments are.

Monetary Policy

Monetary Policy is

the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

provides insight into how to craft optimal monetary policy.

Monetary Policy refers to actions that the Bangko Sentral takes in order to change the equilibrium of the money market. This is to alter the money supply , move interest rates, or both.

The Goals of the Monetary Policy

High Employment

Economic growthStable prices

Interest rate stability

Stability of financial markets

Stability in foreign exchange markets

Objectives of the Monetary Policy

To maintain internal and external monetary stability in the Philippines and to preserve the international value of the peso and its convertibility to other freely convertible currencies

To foster monetary, credit and exchange conditions conducive to a balanced and sustainable growth of the economy.

Tools of Monetary Policy

Required Reserves

the proportion of banks’ deposits and deposit substitute liabilities that banks are required to hold as reserves.

Rediscounting

a special refinancing facility of central banks wherein a financial institution borrows money from the BSP using promissory notes and other loan papers of its borrowers as collateral.

Open Market Operations (OMO)

the sale or purchase of government securities by the BSP to withdraw liquidity from or inject liquidity into the system.

Selective Credit Control

A tool that lets BSP selects what kind of credit it will give to its clients.

Moral Suasion

the influence which the central bank exercises to induce or convince banks to conduct operations in a manner that would contribute to the attainment of monetary goals but not necessarily support the profit-maximizing objectives of the banks.

Discount Policy

policy taken by the central bank to increase and decrease the money circulation by raising or lowering bank rates. If the Central Bank raised bank rates, its aim to reduce the amount of money. With the high rates, people are expected to save their money in bank