TOOLS OF

MONETARY
POLICY
GROUP 6
GUZMAN, KIM TIFFANY
JAVINIAR, JIANH PEARL
MALONZO, MARY AILEEN B.
PANDIA, WELLA JOY
 SUPPLY & DEMAND CURVE
• MONEY SUPPLY CURVE
– Represents the total
supply liquid money in the
nation’s economy.
• MONEY DEMAND CURVE
– represents the demand
from money as an assets
and as a medium of
exchange which to buy
output or goods to
produce on the nation’s
economy.
 Demand in the Market for
Reserves: Two Components
1.) Required Reserves:
The reserve ratio is the portion of reservable
liabilities that commercial banks must hold
onto, rather than lend out or invest. This is a
requirement determined by the country's
central bank.
 Demand in the Market for Reserves:
Two Components
2.) Excess reserves
• are capital reserves held by a bank or financial
institution in excess of what is required by regulators,
creditors or internal controls
• For commercial banks, excess reserves are measured
against standard reserve requirement amounts set by
central banking authorities. These required reserve
ratios set the minimum liquid deposits (such as cash)
that must be in reserve at a bank; more is considered
excess.
• Excess reserves may also be known as secondary
reserves
HOW CHANGES IN THE TOOLS OF MONETARY
POLICY AFFECT THE CENTRAL BANK OF THE
PHILIPPINES FUNDS RATE
• Effects of open an market operation depends on
whether the supply curve initially intersects the
demand curve in its downward sloped section
versus its flat section.
• An open market purchase causes the federal
funds rate to fall whereas an open market sale
causes the federal funds rate to rise (when
intersection occurs at the downward sloped
section).
HOW CHANGES IN THE TOOLS OF MONETARY
POLICY AFFECT THE CENTRAL BANK OF THE
PHILIPPINES FUNDS RATE
• Open market operations have no effect on the
federal funds rate when intersection occurs at
the flat section of the demand curve.
• If the intersection of supply and demand
occurs on the vertical section of the supply
curve, a change in the discount rate will have
no effect on the federal funds rate.
HOW CHANGES IN THE TOOLS OF MONETARY
POLICY AFFECT THE CENTRAL BANK OF THE
PHILIPPINES FUNDS RATE
• If the intersection of supply and demand occurs
on the horizontal section of the supply curve, a
change in the discount rate shifts that portion of
the supply curve and the federal funds rate may
either rise or fall depending on the change in the
discount rate.
• When the Fed raises reserve requirement, the
federal funds rate rises and when the Fed
decreases reserve requirement, the federal funds
rate falls.
 Conventional Monetary Policy Tools
• It is a set of instruments available to a central
bank to control the money supply level.
• It is stuctured around 3 axes: Open market
operations, reserve requirement ratios and
the discount rate
 OPEN MARKET OPERATIONS
• a monetary tool which involves the BSP
publicly buying or selling government
securities from banks and financial institutions
in order to expand or contract the supply of
money
 ADVANTAGES OF OPEN MARKET
OPERATIONS
• The BSP has complete control over the volume
• Flexible and precise
• Easily reversed
• Quickly implemented
 DISCOUNT POLICY
• The BSP extends discounts, loans and
advances to banking institutions in order to
influence the volume of credit in the financial
system.
• The rediscounting facility allows a financial
institution to borrow money from the BSP
using promissory notes and other loan papers
of its borrowers as collateral.
 ADVANTAGES AND DISADVANTAGES
OF DISCOUNT POLICY

• Used to perform role of lender of last resort

• Cannot be controlled by the BSP; the decision
maker is the bank
• Discount facility is used as a backup facility to
prevent the BSP rate from rising too far above
the target
 RESERVE REQUIREMENT
• refer to the percentage of bank deposits and
deposit substitute liabilities that banks must
set aside in deposits with the BSP which they
cannot lend out, or where available through
reserve-eligible government securities.
• Changes in reserve requirements have a
significant effect on money supply in the
banking system, making them a powerful
means of liquidity management by the BSP
 DISADVANTAGES OF RESERVE
REQUIREMENTS

• No longer binding for most banks

• Can cause liquidity problems
• Increases uncertainty for banks