The Economics of

Central Banking
and its organizational
implementation in the
Bangko Sentral ng Pilipinas
1
Basic central banking
What do we
associate
central banks with?

2
Definitions of MONEY

l By function
l By composition
l By “nearness” to cash
(liquidity)

3
Definitions of MONEY, continued

l By function
1. Unit or Measure of Value
2. Medium of Exchange
3. Store of Value
4. Standard of Deferred Payment

4
Definitions of MONEY, continued

l By function
1. Unit or Measure of Value
2. Medium of Exchange
3. Store of Value
4. Standard of Deferred Payment

5
Vicious Cycle of Money
Money can perform its 4 functions
because it is acceptable,

and it is acceptable
Because it performs its functions.

6
Definitions of MONEY, continued

By composition
l By “nearness” to cash
(liquidity)
as Liabilities of Financial institutions
1. M1
2. M2
3. M3
4. M4

7
Definitions of MONEY, continued

By composition
By “nearness” to cash (liquidity)
as Liabilities of Financial institutions

1. M1
a. currency in circulation
b. demand deposits
(or transferable deposits)

8
Definitions of MONEY, continued

By composition
By “nearness” to cash (liquidity)
as Liabilities of Financial institutions

2. M2
a. M1
+
b. Quasi-money
i. savings deposits
ii. time deposits
9
Definitions of MONEY, continued

By composition
By “nearness” to cash (liquidity)
as Liabilities of Financial institutions

3. M3
a. M2
+
b. deposit substitutes
(or securities other than shares eligible as deposit substitutes)

10
Definitions of MONEY, continued

By composition
By “nearness” to cash (liquidity)
as Liabilities of Financial institutions

4. M4
a. M3
+
b. Transferable and other deposits
in foreign currency (FCDs) by
residents
11
MONEY by ORIGIN
1. Money of Domestic Origin

Loans and credits of the central bank

and banks (net domestic assets)

2. Money of Foreign Origin

(Inflows from abroad, balance of
payments outcome)
Examples: proceeds of exports,
remittances, foreign direct investments,
foreign financial (portfolio) investments,
proceeds of loans 12
SOME ECONOMIC CONCEPTS

a. PRICES
1. Consumer prices
2. Exchange rates
3. Interest rates

b. NOMINAL VS. REAL

c. REAL vs. FINANCIAL SECTORS

13
MONETARY POLICY

seeks to achieve desirable changes

in the level of
AGGREGATE DEMAND

via
changes in
MONEY SUPPLY.

14
CONDITIONS for Monetary Policy
to be possible:

1. A relationship must exist between the

money supply (independent variable) and the
level of aggregate demand (dependent variable);

2. Size of money supply must be independent

of the level of aggregate demand; and

3. Money supply must be subject to control

of monetary authorities.
15
Expansion of Money and Credit
through loans and deposits is only
possible under a fractional reserve
system.

In a fractional reserve system, banks will hold

as reserves only a fraction of their deposits,
and lend the rest.

16
Money Multiplier
is the expansion of a country's money supply
that results from banks being able to lend.

The size of the multiplier effect depends on

the percentage of deposits that banks are
required to hold as reserves.

In other words, it is money used to create

more money and is calculated by dividing
total bank deposits by the reserve
requirement.
17
Money multiplier rules

•The higher the reserve requirement,

the tighter the money supply, which
results in a lower multiplier effect for
every peso deposited.

•The lower the reserve requirement, the

larger the money supply, which means
more money is being created for every
peso deposited.
18
Monetary Policy Instruments

1. Reserve requirement
2. Loans and Credit Operations
3. Open Market Operations
4. Moral Suasion

19
PRIMARY OBJECTIVES of the BSP

To maintain PRICE STABILITY

conducive to a
BALANCED and SUSTAINABLE
growth of the economy
To promote and maintain monetary
stability and the convertibility of the
peso (the Philippines’ currency)

20
SOME CONCEPTS of PRICE

What is price?

1. Consumer prices
2. Interest rates
3. Exchange rates

21
Concept: Balance of Payments (BOP)
1. It measures the payments of any individual
country with all other countries, also termed as
rest of the world.
2. It is used to summarize all international
economic transactions for that country during a
specific time period, usually a year.
3. It reflects all payments and liabilities to
foreigners (debits) (and all payments and
obligations received from foreigners (credits).

22
Concept: Determinants of BOP
1. Exports less Imports of Goods and
Services, (Trade Account), and
Net Factor Income (remittances,
interests, dividends) and
Transfer Payments, net of which is called
Current Account
2. Capital Account
2.1 loans
2.2 foreign investments
2.2.1 foreign financial or portfolio investments
2.2.2 foreign direct investments

23
Concept: Determinants of
EXCHANGE RATES

• BOP Outcome: BOP surplus or

BOP deficit
International reserves

24
Monetary Authorities (central banks)
make the decision or influence
the exchange rate, based on
exchange rate regime followed:
1. fixed exchange rate
2. market determined (floating)
- free float
- managed float

These can be done through its domestic

and foreign operations.
25
Organizational
implementation
of central banking
in the
Bangko Sentral ng Pilipinas

26
Establishment of the BSP

l Republic Act 7653: The New

Central Bank Act
took effect on
3 July 1993
l Capitalization: PhP 50 billion
of which PhP 10 billion was paid-in by
the government of the Republic of the
Philippines
27
Departments and Offices
involved in Money Supply
1. Department of Economic Research
2. Center for Monetary and Financial Policy
3. Department of Economic Statistics
4. International Department
5. Banknotes and Securities and Printing
Department
6. Mint and Refinery Department
7. Cash Department
8. Currency Issue and Retirement Office
9. Payments and Settlements Office
28
Monetary Policy Implementation by
Department/Office in BSP

1. Reserve requirement
§ Department of Economic Research
§ Center for Monetary and Financial Policy
§ Financial Accounting Department
§ Supervision and Examination Sector

29
Monetary Policy Implementation by
Department/Office in BSP

2. Loans and Credit

§ Department of Economic Research
§ Center for Monetary and Financial Policy
§ Department of Loans and Credit
§ Financial Accounting Department
§ Supervision and Examination Sector

30
Monetary Policy Implementation by
Department/Office in BSP

3. Open Market Operations

Repurchase and ReverseRepurchase
Agreements, Special Deposit Accounts
§ Department of Economic Research
Treasury Department
§ Financial Accounting Department
§ Supervision and Examination Sector

31
Monetary Policy Implementation by
Department/Office in BSP

4. Moral Suasion
§ Governor
§ Monetary Board members

32