MONETARY- RELATING TO MONEY OR

CURRENCY

POLICY- A STATEMENT OF INTENT,

AND IS IMPLEMENTED AS A
PROCEDURE OR PROTOCOL
 IS THE WAY THE GOVERNMENT CONTROLS
THE SUPPLY OF MONEY AS A WAY TO
INFLUENCE PRICE STABILITY AND BRING
TRUST IN THE VALUE OF THE CURRENCY.
 The Bangko Sentral ng Pilipinas or BSP is the
central monetary authority of the Republic of
the Philippines.
 It provides policy directions in the areas of
money, banking and credit and exists to
supervise operations of banks and exercises
regulatory powers over non-bank financial
institutions.
 TO PROMOTE PRICE STABILITY CONDUCIVE
TO BALANCED AND SUSTAINABLE GROWTH
OF THE ECONOMY.
 CONTRACTIONARY- WHEN THERE IS “TOO
MUCH MONEY” IN THE ECONOMY
SUPPORTING OVERALL DEMAND FOR GOODS
AND SERVICES.

 EXPANSIONARY- WHEN THERE IS “TOO LITTLE

MONEY” IN THE ECONOMY WHICH DAMPENS
OVERALL DEMAND FOR GOODS AND
SERVICES.
IN THE PHILIPPINES:
OPEN MARKET OPERATIONS

 It involves the buying and selling of

government securities from banks and
financial institution of the BSP in order to
expand or contract the supply of money.
 THIS REFERS TO TRANSACTIONS WHEREBY
THE BSP EXTENDS CREDIT TO A BANK
COLLATERALIZED BY ITS LOAN PAPERS TO
CUSTOMERS.
 THIS IS THE MINIMUM AMOUNT OF RESERVES
THAT BANK MUST HOLD AGAINST DEPOSITS.
 THE RESERVE REQUIREMENTS WHICH ARE
HELD BY BANKS AS CASH IN THEIR VAULTS
AND DEPOSITS WITH THE BSP, HELP TO
CONTROL THE MONEY AND CREDIT BY
AFFECTING THE DEMAND FOR MONEY
RESERVES AND THE MONEY MULTIPLIER
 1. Monetary Targeting- is a simple rule
for monetary policy according to which the
central bank manages monetary aggregates as
operating and/or intermediate target to influence
the ultimate objective, price stability.

 2. Exchange-Rate Targeting- is the process

through which a central bank intervenes in the
market mechanism to maintain the exchange
rate at a particular level that they deem as
desirable.
 3. Inflation Targeting- is a central bank
strategy of specifying an inflation rate as a
goal and adjusting monetary policy to achieve
that rate. Inflation targeting primarily focuses
on maintaining price stability, but is also
believed by its proponents to support
economic growth and stability.
 IT DESCRIBES SITUATIONS WHERE THE
PASSING OF TIME, POLICIES THAT WERE
DETERMINED TO BE OPTIMAL YESTERDAY ARE
NO LONGER PERCEIVED TO BE OPTIMAL
TODAY.
 In 2004, Finn E. Kydland and Edward C.
Prescott were awarded the Nobel Prize in
Economics for their work on the time
inconsistency of economic policies.

 They showed that time inconsistency was causing

excessive inflation. The central bank has two
core goals: trying to keep inflation close to some
target level, and keep unemployment close to the
natural rate. However, markets are not perfect,
and unemployment is usually higher than its
natural rate. The central bank’s desire to reduce
unemployment to the natural rate leads to time-
inconsistent behavior.
 The central bank will announce that it will set
monetary policy such that inflation equals 2%, and
then let the labor market clear at the market-
clearing level; it means, the level at which there is
no leftover supply or demand. Nonetheless, if
workers believe inflation will effectively be 2%, they
will bargain a 2% wage increase, which will shift the
supply curve to the left. Thus, the central bank has
an incentive to create an inflation surprise and
meet its goal of reducing unemployment at a cost
of higher inflation than first announced. This
illustrates the idea of time inconsistency, since the
first announcement has changed expectations and
the central bank was better off not following what
it first proclaimed.
 REFERS TO THE FREEDOM OF MONETARY
POLICY MAKERS FROM DIRECT POLITICAL OR
GOVERNMENTAL INFLUENCE IN THE
CONDUCT OF POLICY.