Cornejo, Ma. Noemi D.

Finmgt2

June 06, 2012 MWF 4:00-5:00

Monetary Policy is a measure or actions taken by the Central Bank to regulate the supply of money in the economy constitute what is called monetary policy. It is an action of the Bangko Sentral ng Pilipinas (BSP) are aimed at influencing the timing, cost and availability of money and credit, as well as other financial factors for the purpose of stabilizing the price level. If the BSP believes that money supply is in excess of a desired level, then it can take action to reduce the money supply. This is referred to as contractionary monetary policy. On the other hand, if based on the BSPs assessment to expand money supply, it implements as expansionary monetary policy. Monetary policy is the monitoring and control of money supply by a central bank, such as the Federal Reserve Board in the United States of America, and the Bangko Sentral ng Pilipinas in the Philippines. This is used by the government to be able to control inflation, and stabilize currency. Monetary Policy is considered to be one of the two ways that the government can influence the economy the other one being Fiscal Policy (which makes use of government spending, and taxes).[1] Monetary Policy is generally the process by which the central bank or government controls the supply and availability of money, the cost of money, and the rate of interest. Types of Monetary Policy Inflation Targeting - Inflation targeting revolves around meeting publicly announced, preset rates of inflation. The standard used is typically a price index of a basket of consumer goods, such as the Consumer Price Index (CPI) in the United States.[2] It intends to bring actual inflation to their desired numbers by bringing about changes in interest rates, open market operations, and other monetary tools. Price Level Targeting - Price level targeting involves keeping overall price levels stable, or meeting a predetermined price level.[3] Similar to inflation targeting, the central bank alters interest rates to be able to keep the index level constant throughout the years. Flourishing and advanced economies opt not to use this method as it is generally perceived to be risky and uncertain. Monetary Aggregates - This approach focuses on controlling monetary quantities. Once monetary aggregates grow too rapidly,

central banks might be triggered to increase interest rates, because of the fear of inflation.[4] Fixed Exchange Rate - Fixed exchange rate is also often called Pegged Exchange Rate. Here, a currencys value is pegged to the value of a single currency, or to a basket of other currencies or measure of value, such as gold. The focus of this monetary system is to maintain a nations currency within a narrow band.[5] Gold Standard - In Gold Standard, the government allows its currency to be converted into fixed amounts of gold, and vice versa.[6] This may be regarded as a special kind of Fixed Rate Exchange policy, or of Price Level Targeting. This monetary policy is considered flawed because of the need for large gold reserves of countries to keep up with the demand and supply for money. It is no longer used in any country, though it was widely used in the mid-19th century through 1971. Reference: Control #: COM 332.1 R773 1996 18725 Book Title: Money, Credit & Banking in the Philippine Financial System Author : Zacarias M. Ronquillo http://en.wikipedia.org/wiki/Philippine_Monetary_Policy