macro anico
TRANSCRIPT
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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.