MONETARY POLICY 3

MODULE 3: MONETARY POLICY IN THE PHILIPPINES

A. Definition, Objectives, and Functions of Monetary Policy:

- The Bangko Sentral ng Pilipinas (BSP) manages monetary policy to achieve price stability, promote economic growth, and maintain financial stability.

B. Targets and Tools of Monetary Policy:

1. Monetary Aggregates: Various measures of money supply, such as M1 and M2.

    - a. Purchase/Sale of FX: BSP intervenes in foreign exchange markets to influence the value of the currency.

    - b. Open Market Operations: BSP buys and sells government securities to adjust liquidity and interest rates.

    - c. Outright Transactions: Direct purchases or sales of government securities by BSP.

    - d. FX Swaps: BSP conducts foreign exchange swaps to manage liquidity conditions.

    - e. Non-Global Tools: Unique tools like special deposit accounts may be used to manage liquidity.

2. Interest Rates: BSP adjusts policy rates, reserve requirements, and rediscounting facilities to influence bank lending and money supply.

3. Inflation Rates: BSP uses inflation targeting framework to anchor inflation expectations and guide monetary policy decisions.

C. Limitations and Present Thrusts of Monetary Policies:

- Discuss challenges such as external shocks, liquidity traps, and constraints on monetary policy effectiveness.

D. Transmission Mechanism of Monetary Policy in the Philippines:

- Understand how changes in monetary policy affect interest rates, credit conditions, investment, consumption, and aggregate demand in the economy.