MONETARY POLICY INSTRUMENT

measures or actions by the Central Bank to regulate the supply of

money in the econom constitute what is called the monetary policy.
MOnetary policy actions of the BSP are aimed at influencing the timing,
cost and availaility of money and credit , as well as other financial
factors, for the purpose of influencing the price level. this is in line with
the primary mandate of the BSP under RA 7653 otherwise known as the
New Central Bank Act to maintain price stability conducive to a alanced
and sustainable growth of the economy.

Classification of monetary policy instruments:

1. Open Market Operations
It involves the buying or selling of government securities from banks
and financial institutions of the BSP in order to expand or contract the
supply of money. an open market purchase of securities by the BSP
results in an increase in reserves and an increase in the supply of
money. Moreover , an open market sale of securities by the BSP results
in a decrease in reserves and a decrease in the supply of money.
2. Rediscounting
this refers to transactions whereby the BSP extends credit to a bank
collateralized by its loan papers with customers. this instrument plays a
dual role; as a tool to allocate credit to preferred sectors of the
economy and as an instrument to influence the supply of money and
credit. Rediscounting rate is the interest rate charged by the BSP to the
banks that borrow from them.

3. Reserve Requirements
This is the minimum amount of reserves that banks must
hold against deposits.
e.g. let's say MR. Rafael deposits P100,000.00 with Land
Bank of the Philippines. the BSP requires LBP to keep 10%
of deposits.
4. Direct Controls
These consist of quantitative and qualitative limits on the
ability of banks to undertake certain activities. The most
common types of direct controls include limitations on
aggregate bank lending , selective limitations on certain
types of bank lending and interest rate regulations. These
controls are prescribed to promote specific sectors and
focus more on developmental financing . Under the new
charter, the BSP has abandoned direct controls with its
pursuit of more market oriented and deregulated policies.

5. Moral Suasion
The BSP persuades banks to make their lending policies
responsive to the needs of the economy. Banks must tighten
their credit programs in times of inflation and loosen them
in times of recession.

DEMAND FOR MONEY

Transactions motive.Money is a medium of exchange, and people hold money to
buy stuff. So as income rises, people have more transactions and people will hold
more money
Precautionary motive.People hold money for emergencies (cash for a tow truck,
savings for unexpected job loss). Since this also depends on the amount of
transactions people expect to make, money demand is again expected to rise with
income.
Speculative motive.Money is also a way for people to store wealth. Keynes
assumed that people stored wealth with either money or bonds. When interest
rates are high, rate would then be expected to fall and bond prices would be
expected to rise. So bonds are more attractive than money when interest rates are
high. When interest rates are low, they then would be expected to rise in the future
and thus bond prices would be expected to fall. So money is more attractive than
bonds when interest rates are low.So under the speculative motive, money
demand is negatively related to the interest rate.