macro anico

7/31/2019 Macro Anico

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Money is any item that isgenerally accepted as apayment for goods or services

and for the repayment of debts.It is the means by which

transactions and valuation ofeconomic asset are made.


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Money helps facilitatetransactions of buying andselling on cash or on creditwithin the economy it istherefore important to the

smooth functioning of theeconomy.


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Institutional

aspects of

Regulation


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The regulation of money supply

is the responsibility of the BangkoSentral ng Pilipinas (BSP). Thisinstitution is the central bank of the

country, a government financialinstitution charged with the

responsibility of regulating not onlymoney supply but the financialsystem as well.


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The policy board of thecentral bank is the Monetary

Board. This policy board setsthe policies that regulate the

money supply.


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Tools for money

regulation

There are six major

tools of monetarypolicy;


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1. Adjustment of the discountrate

2.Exercise the fiat authority toissue paper money

3.Control of the banks reserverequirements


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4. Direct influence over primary

rate of interest throughtreasury operation and through

overnight lending schemes5. Use of open marketoperations6. Use of moral suasion


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RaiseINTEREST

RATES

raise

DISCOUNTRATE

raise

RESERVEREQUIREMENT

raise

OVERNIGHT

INTERESTRATE

Use

MORAL

SUASION orREGULATORYOVERSIGHT

Sell in

OPEN

MARKET(new and old

Debt papers)

Figure 19-1 TO REDUCE THE MONEY SUPPLY


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Fiat moneyauthority


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Central banks are impoweredto issue the only legal tendercurrency in their country. This

being the case, the decisionto print money is a

governmental decision vestedwithin the central bank.


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Reserve

requirements


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Raising the reserve

requirement for deposits helps tocontract the money supply. This isdone through the effect on the

deposit multiplier. Raising thereserve requirement reduces the

ability to create new money withinthe money system.

t t t


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n t e ot er an , re uc ng t ereserve requirement increases the

money supply. If the legal reserve isthe 20% of deposits, any newdeposits in the banking system can

generate potential expansion of newcredit system equivalent to 5 times

the original deposits. A 10%requirement expands creditpotentially by which as much, to 10

times.


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Discount rate


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scoun ng s n e us nesspractice of buying a particular asset

as less than its face value. Thecentral bank is often describe also alender of last resort. A commercial

can ask the central bank to lend itsfunds on the basis of its outstandingreceivables. These receivables arepromissory note or those notes thatare pledged to it by the borrowers of

the bank.


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The discount is determined by the

central bank. The discount rate(sometimes known as rediscountrate because the papers that a

bank may present to the centralbank may have been already

promissory note that beendiscounted by a bank when it lentto the borrower.


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The discount rate is a measure of

the cost of money. It is an interestrate. A high rate of interest resultfrom a high discount rate. Such an

interest means less demand formoney and therefore has an effect

on the demand side. If the centralwishes to make credit tighter, it cando so by raising the discount rate.


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Rates ofinterest ongovernment

funds


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There are number oftransaction involving the

government that are withinthe control of the central

bank through its power toset the rate of interest.


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Banks that are needs

additional funds to havereplenish their deficiencies.

Those banks having excessfunds can lend to thoselacking funds to be able toclose their books for the day.


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By raising the interest rate,

the Central Bank signals theneed to tighten the money

supply. By reducing the rate ,it promotes monetary andcredit ease anf so the moneysupply can expand.


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Open market

operations


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Debt instruments in the capitalmarket-both of privatecompanies that have solidfinancial positions and of the

government could be traded inthe in open in the presence of

a well-developed capitalmarket.


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The government sells debt

instruments to the general public inorder to borrow or to change thenature of ownership of these debt

papers. When the governmentborrows, it does so by issuing the

debt instrument called bonds,treasury bills, and other forms ofIOUs


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(in the 1980s, the central bankissued IOUs called central bankbills) that can be sold to the privatesector through financial institutions

and investment agencies. Theycan be sold and they can bebought back by the government. Tobuy back means to repay it or toresell the paper at discount.


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*Open market operations in thegovernment debt papers generallymean of buying and selling ofgovernment securities in the

capital market. The largest holdersof government debt instrument orbonds are financial institutions-commercial banks, investmenthouses, pension funds, and so on.


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Money market

and open market

operations


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When the central bank sells

from its holdings ofgovernment securities and

open market, the buyer(private sector) makes out acheck to seller(the centralbank, or the government) topay for the bonds


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This contracts the amount of

deposits held in the banks for theaccount of the buyer of the bonds.As a result, the supply of demanddeposits falls. In this case, thecentral bank holds more bond

papers and it has effectivelyreduce the money in the circulation


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*Bond market is theoverall bond market,which includes private

and government bonds.


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THE CENTRAL

BANK


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Central banks all over theworld share major

characteristics. Thefollowing are the most

important:

Figure 19-2 CHARACTERISTICS AND MAIN ACTIVITIIES OF CENTRAL


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Figure 19 2 CHARACTERISTICS AND MAIN ACTIVITIIES OF CENTRAL

BANKS

CENTRALBANK

Publicity

owned

Asgovernment

banker,

agent,adviser

Bankers

bank

Lender oflast resort

Custodianof

Countrys

International

reserves

Regulatoryof

Monetaryand

Financialactivities

P bli l d


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a. Publicly-owned-To perform the functions of

the central bank, governmentownership is not essential. But

government ownership is acommon factor among central

banks. The Bangko Central ngPilipinas is fully-owned andcontrolled by the government.


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This is likewise the case

with the many centralbanks founded after the

Second World War whenmany countries became

politically independent.


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b. Bank of currency issue and ultimatesource of money

-Almost all central banksperformed the note issue function for

the country. The notes are regulated intheir supply by the government, whichmay be represented by the monetaryauthority or by the requirements of thegovernment budget.

n


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The central bank can provideall the money the governmentrequires. But sometimes the

currency issue function couldbe taken by the private

banks.


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The Philippine central bankprints the paper money andmints the coinage more

significant than the note issuefunction in the central banks

role as the ultimate provider ofcash.


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This depends on the willingness ofthe community to accept all thenotes and checks drawn on the

central bank. The general publicwill accept such checks because

the commercial banks will creditthe proceeds to the depositorsaccount.


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c . As Governments banker, agentand financial adviser

- The central bank serves as abanker, agent and adviser of thegovernment. These roles are tied

up with its function issue to notes.


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As the Banker


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The central bank may conduct

the banking accounts ofagencies and instrumentalities

of governments, although inthe Philippines the presence ofgovernment banks, such as the

Philippine National Bank, hasmade this less pressing.


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As an Agent

The central also perform the


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The central also perform thefunction of providing foreign

exchange required to meetgovernmental purchases of

imports , the servicing offoreign debt, and the

management of foreignexchange assets and

liabilities


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As an financial

adviser


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When banks are in need of

additional resources to covertemporary situations, a bank thatthey can turn for help is useful. All

central bank perform this functionor servicing other banks. This

includes such activities asmaintaining accounts for othercommercial banks.


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d. Bankers Bank

-When banks are in need ofadditional resources to covertemporary situations, a bank that

they can turn for help is useful. Allcentral bank perform this function orservicing other banks. This includessuch activities as maintainingaccounts for other commercial banks.


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e. Lender of last resort

-One of the most importantfunction of the central bank is to

provide loans to banks when theyare short of cash. This is the vitalfunction designed to protect financial

institutions from failures and bankruns.


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Bank Run

is a situation in which anabnormal number of

depositors withdraw theirdeposits, normally caused bya lack of confidence in abank.


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But when a bank turns to the

central banks during theseoccasions, the assistance itreceives is not free. It carrieswith its terms and conditionsthat ideally would lead such a

bank back to normaloperations.

n s or e ass s ance as


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n s or , e ass s ance asits costs to the borrowing

bank. In the Philippines, thecentral bank is also a lender

of last resort to investmenthouses perform nearbanking functions. They arelicensed by the central bankto take deposits and invest


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f. Custodian of the countrys

reserves of foreign currency-Central banks naturally serve as

the keeper of the countrys reserves

of international currency. The functionof being custodian of internationalreserves evolved from the note issue

function and that of keeping thereserves of other banks.


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g. Regulation of monetary and

financial activities- Most central bank are giventhe authority to regulate the

operations of all banks and otherfinancial institutions in the country.

This includes the supervision of

banks and other financialinstitutions to assure their solvency

and to protect the general public.


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Among other

duties related tothis are:


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1. The regulation of the condition for theestablishments of new banks and theprescription of qualifications for bank officersand directors;

2. The determination of the activities theycan engage in;

3. The conditions for deposits-taking andloan-giving.

The Philippine central bank has


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The Philippine central bank hashad a history of 50 years. One

of the major lessons learned fromthe past was that the central bankwould perform better if monetarypolicy were used as a neutral toolof policy rather than as an active

instrument of economicdevelopment policy.


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Most of the policies in the past

by the central bank weredesigned to helped or facilitateeconomic development. Tocomplement this, it adoptedpolicies that made it an active

participant in policy making topromote development.


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The result was that it

implemented active economicpolicies to promote industrial

and agricultural developmentand preferential credit policies

for favored sectors.


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The original charter ofthe CBP outlined its

general objectives asfollows:


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1. Maintenance of monetary

stability2. Preservation of the international

value and convertibility of the pesointo other freely-convertiblecurrencies.

3.The promotion of a rising level ofproduction, employment and realincome.


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Preferential

rediscounting

Means that for some types offavoured activities, the rediscountrate charge by the central bank

was lower than for normal types ofloan papers.


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Selective

credit controls

Credit priorities are another


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Credit priorities are anotheroutcome of efforts to direct

monetary policy towardsspecial developmental goals.

Priority credit programs weredesigned to promote

production activities, forinstance, rather than borrowingfor consumption.


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Foreign exchangecontrols

The allocation of the use offoreign exchange is the mirror

of the use of credit fordevelopmental purposes.


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Since foreign exchange is sointertwined with the topic of credit

and money, the subject of foreignexchange controls can be includedin this discussion of preferential

policies designed to promote


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In the end, the use offoreign exchange often

begins with the allocationof credit for the purchase

of foreign exchange.

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