monetary policy

money and banking

refers to the fundamental

concepts, institutions, and systems through

which money is created, managed, and

distributed in an economy.

It is a central topic in macroeconomics,

examining the functions of money, the role of

banks as financial intermediaries, and how

central ban

medium of exchange

money acts as an intermediary

for transactions, widely accepted by people for

buying and selling goods and services

store of value

money holds its purchasing power

over time, allowing people to save their earnings and

spend them later

unit of account

money provides a common measure

for pricing items, simplifying economic calculations

and comparisons of value

standard of deferred payment

- money is used for

making purchases today, that will be paid for in the

future, facilitating loans and future agreement

financial intermediation

Banks accepts deposits from savers

and use these funds to issue loans to individuals and businesses,

such as mortgagers or business loans

payment system

Banks provides the infrastructure for safe

and efficient payment systems, including checking accounts,

debit cards, and electronic transfers

money creation

Through a system called fractional-reserve

banking, banks literally create new money when they make

loans. When a bank lends out a portion of its deposits, that loan

is typically deposited into another account, increasing the total

money supply beyond the original amount

risk management

Banks manage the risk associated with

lending by diversifying their loans and holding reserves. They

also protect deposits through various security measures and

federal insurance program

BSP

is the central

bank of the Republic of the Philippines

July 3, 1993

established

Federal Reserve System (Federal Reserve or Fed)

is the central

banking system of the United States

FED created

December

23, 1913,

European central bank

is the

central bank for the 19 European Union

countries that use the euro, with its main

goal of maintaining price stability and

managing the eur

central banking

this is the activity of a central bank like

BSP that controls the nation’s money supply and credit.

Central bank are tasked with maintaining economic stability.

monetary policy

this is the method used by a central bank

to achieve its objectives, such as price stability and

sustainable economic growth

central bank independence

delegating monetary policy

to an independent central bank can help it resist pressure

to over stimulate the economy, which helps in achieving

expansionary policy

when there

is too little money in the economy, the

central bank can lower interest rates to

encourage borrowing and spending and

discourage saving

contractionary policy

when

the economy is overheating, the central

bank can raise interest rates to curb

spending and inflatio

open market operations

the most common tool where

the central bank buys or sells government securities to

influence the money supply

reserve requirements

- the amount of money that banks

must hold in reserve, which affects how much they can

lend

interest rates policy

setting targets rates like the

federal funds rate in the US influence other interest

rates throughout the economy

other tools

hese can include unconventional methods

like purchasing long-term bonds or providing forward

guidance, especially when short-term rates are near zer

commercial banks drive creation

The

m a j o r i t y o f m o n e y i s c r e a t e d b y

commercial banks when they issue new

loans. When a bank approves a loan, it

“keystrokes” a new deposit into the

b o r r o w e r ’s a c c o u n t .

lending decision

Banks primarily

decide whether to lend based on

profitable lending opportunities, the

borrower’s creditworthness, and

general economic conditions, not

whether they have pre-existing

deposits or reserves to lend o

central bank coordinates and regulate

The central bank’s role is to ensure

stability and manage the conditions under

which commercial banks create money.

money destruction

The money supply is

reduced (destroyed) when loans are

repaid, as the bank deposit is debited and

the loan liability is cancelle

money supply indicators

- are often found to contain necessary

information for predicting future behavior of prices and

assessing economic activity.

m1 narrow money

Currency in circulation/availability for

spending)

m2 broad money

(Financial assets held principally by

households/money market deposits)

m3 broad money liabilities

money substitutes such as

promissory notes and commercial papers)

m4 liquidity money

transferable deposits, treasury bills and

deposits held in foreign currency deposits/short term highly liquid

assets)Monetar

repurchase and reverse repurchase

this is

carried through the Repurchase Facility and

Reserve Purchase Facility of the BSP. In Purchase

transactions, the BSP buys government securities

with dedication to sell it back at a specified future

date, and at a predetermined interest rat

outright transactions

Unlike the repurchase or

reverse repurchase, there is no clear intent by the

government to reverse the action of their

selling/buying of monetary securities, thus, this

transaction creates a more permanent effect on our

monetary suppl

foreign exchange swaps

refers to the

actual exchange of two currencies at a specific

date, at a rate agreed upon the deal date and

the reverse exchange of the currencies at a

farther date in the future

acceptance of fix term deposits

expand its liquidity management, the BSP

introduced this method in 1998. In the Special

Deposits Account (SDA), consists fixed terms

deposit by banks and institutions affiliated with

the BSP.

rediscounting

a standing credit

facility provided by the BSP to help banks

meet temporarily liquidity needs by

refinancing

reserve requirements

banking institutions,

there are required amounts that banks cannot lend

out to people. They always need to maintain certain

balance of money, which are called “reserves”

,

once these reserves requirements are changed and

are varied changes in the monetary supply will be

observe greatly.

the two form

regular/statutory reserves and

liquidity reserve

modified approach

The framework was not a

complete abandonment of the old system, but a

modification. It complemented the existing

monetary aggregate targeting with some

form of inflation targeting to improve

monetary policy's effectiveness.

emphasis on price stability

This new

framework placed a greater emphasis on

achieving price stability as the primary goal of

monetary polic

currency approach

Inflation targeting

is a forward-looking monetary policy

framework where a central bank publicly

announces a specific inflation target and

uses its policy tools, primarily adjusting

interest rates, to achieve that target over a

given time perio