FIMA-30043 Monetary-Policy-and-Central-Banking monetary policy lectures PDF

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INSTRUCTIONAL MATERIALS FOR FIMA 30043 MONETARY POLICY AND CENTRALBANKINGCOMPILED BY: ARIS G. NORBERTEINTRODUCTIONThis instructional material is intended for exclusive use of BSBA Major in Financial Managementstudents enrolled in the course FIMA 3004 3 – Monetary Policy and Central Banking.Knowledge...

Description

INSTRUCTIONAL MATERIALS FOR FIMA 30043 MONETARY POLICY AND CENTRAL BANKING COMPILED BY: ARIS G. NORBERTE

INTRODUCTION

This instructional material is intended for exclusive use of BSBA Major in Financial Management students enrolled in the course FIMA 30043 – Monetary Policy and Central Banking. Knowledge of the role of central bank and monetary policy in the economy. Topics include the financial services industry, banking and financial regulation, monetary theories, variables influencing the monetary policies, the functions and operation of the Bangko Sentral ng Pilipinas and the Monetary Board Assessment questions and activities are also provided at the end of the material to gauge how well the student understood the discussions. Upon completion of this instructional material, the student is expected to have a clear understanding of Bangko Sentral ng Pilipinas in the Philippine Financial System and Monetary Policy.

COURSE CODE

:

FIMA 30043

COURSE TITLE

:

MONETARY POLICY AND CENTRAL BANKING

CREDIT UNITS

:

3 UNITS

COURSE PREREQUISITE

:

FIMA 30023 – Banking and Financial Institutions

COURSE DESCRIPTION

: This course is designed to provide an understanding about the role of central bank and monetary policy in the economy. Topics include the financial services industry, banking and financial regulation, monetary theories, variables influencing the monetary policies, the functions and operation of the Bangko Sentral ng Pilipinas and the Monetary Board

COURSE OUTCOMES : At the end of the course, the learner should be able to:

       

Discuss the basic concepts and principles of credit risk management Analyze the risks associated with the company’s credit policy Discuss the internal credit environment of a lender Evaluate the credit and collection management process in a firm Analyze business and consumer credit profiles to determine credit risk Evaluate factors that affect the decision in credit and collection operation Formulate control measures in credit and collection management activities Discuss social responsibility and ethics as related to credit and collections

COURSE CONTENT

Week 1

Topics Introduction to the course contents, activities, and requirements.

2 Nature and Definition of Central Banking in the Philippines Nature and meaning of Central Banking

Learning Outcomes Demonstrate interest and appreciation of the importance of knowing the course Define Banking

Resources/References Course Syllabus

Central

Describe the history of central banking in the Philippines Explain the nature of central banking

Evolution of Central Banking in the Philippines History of the Central Bank/Bangko Sentral ng Pilipinas

The New Central Bank Act (RA 7653) Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005 Central Banking for Every Juan and Maria Bunye, Ignacio 2011 www.bsp.gov.ph

3 Primary Objectives, Significant Characteristics and Important Services of the Bangko Sentral ng Pilipinas

Comprehend and extrapolate the primary goals of the Bangko Sentral ng Pilipinas as a central Primary objectives of banker the Bangko Sentral ng Pilipinas Explain the characteristics of Characteristics of Bangko Sentral ng Bangko Sentral ng Pilipinas and their significant Pilipinas differences

The New Central Bank Act (RA 7653) Cesar, Augustus 2002 Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral &

Services performed by the the Bangko Sentral ng Categorize Pilipinas services performed by Bangko Sentral Comparison of RA No. ng Pilipinas to the general public, to 265 and RA No. 7653 banks and other financial institutions The new organizational structure of the Bangko Sentral Identify the changes ng Pilipinas and the functions and improvement of each department applied to RA No. 7653 from RA No. 265

the Philippine Economy BSP Publications, 2005 Central Banking for Every Juan and Maria Bunye, Ignacio 2011 www.bsp.gov.ph

Differentiate the functions of Bangko Sentral ng Pilipinas departments and how it affects the whole organization 4-5

The Bangko Sentral ng Discuss the history Pilipinas and the of Philippine Means of Payment Currency

The New Central Bank Act (RA 7653)

History of the Philippine Currency

Determine regulations

Justification of the power to issue notes and coins

Comprehend and extrapolate the definition of currency and demand deposits and its application

Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003

Note issue regulation

issue

Express different opinion about current events and explain the role of Bangko Sentral ng Pilipinas for a particular situation

6-7

Domestic and International Monetary

The Bangko Sentral & the Philippine Economy BSP Publications, 2005 Central Banking for Every Juan and Maria Bunye, Ignacio 2011 www.bsp.gov.ph

Identify the actions The New Central Bank

Stabilization of Bangko Sentral Pilipinas

the ng

Bangko Sentral ng Pilipinas action on the problems of monetary aggregate-credit and price levels; monetary tools of the Bangko Sentral ng Pilipinas and how they are used to solve the above-stated problems International reserves, its objective and composition and Bangko Sentral ng Pilipinas action when international stability of peso is threatened

of Bangko Sentral ng Pilipinas to issues about price level changes, monetary aggregatecredit Differentiate the use of Bangko Sentral ng Pilipinas monetary tools to create a balance in the Philippine financial system Identify the effects of demand and supply of money circulation in the economy

Act (RA 7653) Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005 Central Banking for Every Juan and Maria Bunye, Ignacio 2011 www.bsp.gov.ph

Assess the effect of international reserve to the international stability of the peso Express different opinions about current events and explain the role of Bangko Sentral ng Pilipinas for a particular situation

8

Bangko Sentral ng Pilipinas Management of Monetary Aggregates Operation in gold and bullion exchanges, purchase and sale of gold, purchase and sale of foreign exchange, exchange rates and its determination by the Bangko Sentral ng Pilipinas, and its operation with foreign entities

Comprehend and extrapolate the operation of gold and bullion exchanges and its effect to the maintenance of the stability of Peso Distinguish different factors affecting the foreign exchange rates Recognize exchange operations

foreign

The New Central Bank Act (RA 7653) Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005 Central

Banking

for

Regulation of foreign exchange operations of the banks

Identify important regulations regarding foreign exchange operations of banks

Every Juan and Maria Bunye, Ignacio 2011 www.bsp.gov.ph

Express different opinions about current events and explain the role of Bangko Sentral ng Pilipinas for a particular situation 9 10

MIDTERM EXAMINATION Loans to Banks and Other Financial Institutions

Interpret the guiding principles of Bangko Sentral ng Pilipinas Credit Policy – Bangko about its different Sentral ng Pilipinas credit policies guiding principles Comprehend and Normal credit extrapolate the operations rationale of Bangko Sentral ng Pilipinas Special credit in extending credit to operations banks and other financial institutions Emergency credit operations Compare Bangko Sentral ng Pilipinas Credit terms processes for normal credit Open market operations, special operations credit operations and emergency Other selective regulations: credit operations Margin Requirements against Letters of Express different opinion about Credit current events and Security Against Bank Loans explain the role of Portfolio Ceilings Bangko Sentral ng Pilipinas for a Minimum Capital Ratio particular situation Explain the Mechanics and computation of other Selective Regulations, it’s it

The New Central Bank Act (RA 7653) Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005 Central Banking for Every Juan and Maria Bunye, Ignacio 2011 www.bsp.gov.ph News articles

impact to economy and restriction imported goods 11 The Custodian of Cash Reserves of Banking Institutions and Non-Bank Financial Intermediaries Significance centralized reserves

of cash

Bank reserves: type of reserves of four lines of deposits Computation of legal reserves in Bangko Sentral ng Pilipinas Objectives of deposit reserves in Bangko Sentral ng Pilipinas Significance of clearing system

12 Bangko Sentral ng Pilipinas as Government Banker, Agent and Financial Adviser Functions of Banker of the Government Functions of agent of government securities Purpose of Securities

the the of

Assess the significance of centralized cash reserves and examine the role of Bangko Sentral ng Pilipinas in securing and facilitating reserves in the Philippines Differentiate the four types/lines of deposits Compute the legal reserves of different types of banks and other financial institutions before its operation/ establishment

The New Central Bank Act (RA 7653) Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005 Central Banking for Every Juan and Maria Bunye, Ignacio 2011 www.bsp.gov.ph

Analyze the role of Bangko Sentral ng Pilipinas in the clearing system of checks and identify its significance

News articles

Comprehend and extrapolate the role of Bangko Sentral ng Pilipinas as the banker of the government

The New Central Bank Act (RA 7653)

Comprehend and extrapolate the role of Bangko Sentral ng Pilipinas as an agent of government securities

Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005

Stabilization (SSF)

Fund

Interpret and analyze the purpose Privileges and of securities prohibitions of the stabilization fund Bangko Sentral ng and determine its Pilipinas effect to the monetary system

Central Banking for Every Juan and Maria Bunye, Ignacio 2011 www.bsp.gov.ph News articles

Examine the privileges and prohibitions of the Bangko Sentral ng Pilipinas Express different opinion about current events and explain the role of Bangko Sentral ng Pilipinas for a particular situation 13-14 Bangko Pilipinas Policies

Sentral ng Interpret and Monetary comprehend and extrapolate the nature and features Definition of policy, its of Bangko Sentral nature and features ng Pilipinas policies The Monetary Board, Describe the roles of its composition and the Monetary Board, functions its functions, tenure and employment Monetary Tools of terms Banko Sentral ng Pilipinas Differentiate the monetary tools and policies of Bangko Sentral ng Pilipinas to control money supply Express different opinion about current events and explain the role of Bangko Sentral ng

The New Central Bank Act (RA 7653) Monetary Policy Fender, J. 2012 Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005 www.bsp.gov.ph News articles

Pilipinas for a particular situation

15 The Theory of Monetary Policy Monetary Theory Demand and Supply of Money

Explain fully the meaning of Monetary Theory Examine the role of Bangko Sentral ng Pilipinas in terms of managing the demand and supply of money in the economy Assess financial and Real adjustments Compare the monetary policy of the Bangko Sentral ng Pilipinas to other central banks in other country

16-17

The International Constraint on Monetary Policy The balance of international payments and macroeconomic equilibrium Price levels, exchange rates and international liquidity problem

Comprehend and extrapolate as to how the Bangko Sentral ng Pilipinas maintains the balance of international payments and macroeconomic equilibrium Give examples as to how other countries maintain balance of international

The New Central Bank Act (RA 7653) Monetary Policy Fender, J. 2012 Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005 www.bsp.gov.ph

The New Central Bank Act (RA 7653) Monetary Policy Fender, J. 2012 Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral &

payments and macroeconomic equilibrium

the Philippine Economy BSP Publications, 2005 www.bsp.gov.ph

Appraise performance Bangko Sentral Pilipinas maintaining macroeconomic equilibrium in Philippines

the of ng in the the

Investigate and analyze problems about price levels, exchange rates and international liquidity 18

FINAL EXAMINATION

GRADING SYSTEM

Class Standing • • • • •

70%

Quizzes Case Study Projects Summative Test Portfolio

Midterm / Final Examinations

Midterm Grade + Final Term Grade 2

30% 100% =

FINAL GRADE

REFERENCES The New Central Bank Act (RA 7653) Cesar, Augustus 2002 Central Banking for Every Juan and Maria Bunye, Ignacio 2011 Perspective from Bangko Sentral ng Pilipinas: Money & Banking in the Philippines, BSP Publications 2003 The Bangko Sentral & the Philippine Economy BSP Publications, 2005 News Articles www.bsp.gov.ph

Table of Contents Page Nature and Definition of Central Banking in the Philippines

1-2

Evolution and History of Central Banking in the Philippines

3-4

Assessment and Activities

5

Primary Objectives, Significant Characteristics and Important Services of the Bangko Sentral ng Pilipinas

5

Characteristics of BSP

5

Services performed by the Bangko Sentral ng Pilipinas

5-9

Comparison of RA No. 265 and RA No. 7653

10-14

The new organizational structure of the Bangko Sentral ng Pilipinas and the functions of each department

15-31

Assessment and Activities

31

History of the Philippine Currency

32-34

Justification of the power to issue notes and coins

35-38

Assessment and Activities

38

Domestic and International Monetary Stabilization of the Bangko Sentral ng Pilipinas

38-42

Monetary Tools of BSP

43-49

Assessment and Activities

49

Bangko Sentral ng Pilipinas Management of Monetary Aggregates

49-52

MIDTERM EXAMNINATION

52-63

Loans to Banks and Other Financial Institutions

63-69

Assessment and Activities

70

The Custodian of Cash Reserves of Banking Institutions and Non-Bank Financial Intermediaries Bangko Sentral ng Pilipinas as Government Banker, Agent and Financial Adviser

70-73 73-75

Assessment and Activities

74

Bangko Sentral ng Pilipinas Monetary Policies

74-75

The Monetary Board

75-80

Assessment and Actvities

80

The Theory of Monetary Policy

80-82

The International Constraint on Monetary Policy

82-93

FINAL EXAMINATION

93-119

Nature and Meaning of Central Banking A central bank is a financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations. In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks. In the Philippines, The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines. It was established on 3 July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the New Central Bank Act of 1993. The BSP took over from Central Bank of Philippines, which was established on 3 January 1949, as the country’s central monetary authority. The BSP enjoys fiscal and administrative autonomy from the National Government in the pursuit of its mandated responsibilities. Evolution of Central Banking in the Philippines A group of Filipinos had conceptualized a central bank for the Philippines as early as 1933. It came up with the rudiments of a bill for the establishment of a central bank for the country after a careful study of the economic provisions of the Hare-Hawes Cutting bill, the Philippine independence bill approved by the US Congress. During the Commonwealth period (1935-1941), the discussion about a Philippine central bank that would promote price stability and economic growth continued. The country’s monetary system then was administered by the Department of Finance and the National Treasury. The Philippines was on the exchange standard using the US dollar —which was backed by 100 percent gold reserve—as the standard currency. In 1939, as required by the Tydings-McDuffie Act, the Philippine legislature passed a law establishing a central bank. As it was a monetary law, it required the approval of the United States president. However, President Franklin D. Roosevelt disapproved it due to strong opposition from vested interests. A second law was passed in 1944 during the Japanese occupation, but the arrival of the American liberalization forces aborted its implementation. Shortly after President Manuel Roxas assumed office in 1946, he instructed then Finance Secretary Miguel Cuaderno, Sr. to draw up a charter for a central bank. The establishment of a monetary authority became imperative a year later as a result of the findings of the Joint Philippine-American Finance Commission chaired by Mr. Cuaderno. The Commission, which studied Philippine financial, monetary and fiscal problems in 1947, recommended a shift from the dollar exchange standard to a managed currency system. A central bank was necessary to implement the proposed shift to the new system. 1

Immediately, the Central Bank Council, which was created by President Manuel Roxas to prepare the charter of a proposed monetary authority, produced a draft. It was submitted to Congress in February1948. By June of the same year, the newly-proclaimed President Elpidio Quirino, who succeeded President Roxas, affixed his signature on Republic Act No. 265, the Central Bank Act of 1948. The establishment of the Central Bank of the Philippines was a definite step toward national sover...