Monetary Policy and Central Banking

Monetary Policy and Central Banking (Preliminary)

• This document is a written report on monetary policy and central banking.
• It was submitted by a group of students to Dr. Floresito D. Calub.
• The submission date and time were Thursday, 10:30 AM - 12:00 PM.
• The university is Northeastern Mindanao State University
• The report is preliminary.

Introduction

• Monetary Policy is the central bank's use of changes in interest rates, the money supply, and the exchange rate to influence the level of aggregate demand within an economy.
• Central banks manage a country's currency and control the total amount of money circulating.
• The report will examine money within a nation's economy, monetary standards, and the monetary system.
• The learning outcomes include discussing the history of money, its functions and features as well as its standard practices and issues within the current global and Philippine contexts.

Topic I: Money in the Nation's Economy

• Money acts as a medium of exchange, enabling people and businesses to acquire necessities.
• Historically, bartering was a means of exchange before money was developed.
• Money is crucial for a better quality of life and financial freedom, providing options and choices.
• Saving money early provides financial security in the future.
• The Spanish introduced coins to the Philippines, which were minted in various Spanish countries.
• These were the initial coins in the Philippines in the colonial period.

Evolution of Money

• The Philippines' currency was backed by natural resources, initially pegged to gold, and later became a floating currency.
• The U.S. government introduced a gold standard monetary system, establishing a gold peso and a token silver peso.
• This reform occurred after the Spanish occupation, addressing monetary confusion from earlier eras.
• Spanish introduced coins and paper money. One of the first banks founded was El Banco Español Filipino.

Stages of Money Evolution

• Commodity Money: Money whose value stems from the commodity of which it's made.

• Metallic Money: Coins were introduced during the Spanish occupation, with paper money following. This was issued from the first bank in the Philippines, EL Banco Español Filipino.

• Paper Money: The New Design Series (NDS) banknotes were issued from 1985 to 2013 and were initially succeeded by the BSP Series to the New Generation Currency (NGC) Series.

• Electronic Money: Today, digital currencies are becoming more prevalent.

Functions of Money

• Money acts as a medium of exchange, facilitating purchasing of goods and services.
• It's a unit of account, a common measuring stick for value.
• It's useful in financial markets, where banks loan to individuals and businesses, and investors purchase assets.

Attributes of Money

• General Acceptability: Widely recognized and accepted as a form of payment by everyone.
• Stability of Value: Holds consistent purchasing power over time.
• Portability: Easily transported and carried.
• Cognizability: Easily identified and distinguished from other objects.
• Divisibility: Can be broken into smaller units for various transactions.
• Homogeneity: Units of the same value, shape, and quality.
• Elasticity: Changes in money circulation to adjust to the broader economy.
• Durability: Lasts over time without significant form or substance degradation.

Kinds of Money

• Commodity money: Value derived from the commodity itself.
• Credit Money: Value comes from a governing entity’s trust and backing.

Legal Tender Money

• Legally acceptable payment for debts. The Philippines' central bank, Bangko Sentral ng Pilipinas, issues coins and banknotes for circulation.
• This is fiat currency, backed by government edict.

Topic II: Monetary Standards

• Monetary Standards: Rules and institutions that control currency supply.
• This report addresses the production and control of a nation's currency.
• Monometallism: Monetary system based on a single metal (silver or gold).
• Silver Standard: Monetary unit defined in terms of silver. Standard silver coins with fixed weights and fineness were utilized.
• Gold Standard: Monetary unit defined in terms of gold. Standard gold coins used were of a set fineness and weight.

Topic III: Monetary Systems

• This section discusses different types of monetary systems used by countries.
• Commodity Money: Money with intrinsic value (e.g., precious metals).
• Commodity-Based Money: Value reflects a commodity (e.g., convertible to gold).
• Fiat Money: Currency not backed by commodities, with value determined by government decree.

Money Supply Indicators

• Money Supply: The total amount of money circulating in an economic system.
• M1 (Narrow Money): Includes currency, checking accounts, and travelers’ checks.
• M2 (Broad Money): Includes M1, plus savings accounts, money market mutual funds, and certificates of deposit.
• M3: Includes M2, plus larger time deposits and repurchase agreements.

Monetary Policy in the Philippines

• Open Market Operations: The Bangko Sentral ng Pilipinas carries out repurchase and reverse repurchase transactions.
• Foreign Exchange Swaps: Deals between two parties agreeing on a reciprocal transaction to exchange various currencies while simultaneously agreeing on a specific exchange rate.
• Acceptance of Fixed Term Deposits (FDs): Customers deposit for a specified period at a defined interest rate.
• Standing Facilities: Instruments for banks offering and absorbing overnight liquidity.
• Reserve Requirements: Amounts banks must hold in reserve to meet regulatory obligations.
• Types of reserves include Regular or Statutory Reserves; and Liquidity Reserves.

Philippine New Generation Currency

• The Bangko Sentral ng Pilipinas redesigned banknotes in different denominations. Illustrations on these banknotes depict various historical and cultural sites in the Philippines, including notable historical figures, natural wonders, and cultural landmarks.

This quiz explores the fundamentals of monetary policy and the role of central banking in influencing economic conditions. It covers the historical context, functions of money, and current issues in the global and Philippine financial systems. Dive in to test your understanding of how central banks manage money supply and interest rates.