Monetary Aggregate Targeting vs. Inflation Targeting: the Case of the Philippines
Chapter 1: Introduction and Background of the Study
1.1 Background of the Study: In almost all countries, monetary authority is governed by a central bank. In some countries, it is called federal reserve or reserve bank. Other countries like Andorra, Monaco and North Korea do not have a central bank due to various reasons. The central bank has always been responsible in managing the nation's money supply or its monetary policy through managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during financial crisis. In the past years, central banks in industrialized countries have made great pace in the regulation of monetary policy. The Bangko Sentral ng Pilipinas or BSP is the central bank of the Republic of the Philippines. It was established on July 3, 1993 which it took over from the Central Bank of Philippines or CBP. The BSP enjoys fiscal and administrative autonomy from the national government in the pursuit of its mandated responsibilities. And because the central bank is the one implementing monetary policy, which they discuss in detailed, the primary objective of BSP's monetary policy is to promote a low and stable inflation conducive to a balanced and sustainable economic growth. In order for the BSP to better achieve this objective, the inflation targeting framework for monetary policy was adopted in January 2002 after the monetary aggregate targeting framework. Under the monetary aggregate targeting, the BSP fixes money growth so as to minimize expected inflation. However, under the current framework, BSP sets monetary policy so that price level is not just zero in expectation but is also zero regardless of latter shocks (Gochoco-Bautista, 2001).
The inflation rate of a country has always been one of the most significant economic indicators. It indicates how well the economy is doing and how well the economy is going to do in the future. According to the Department of Economic Research of
1.1 Background of the Study: In almost all countries, monetary authority is governed by a central bank. In some countries, it is called federal reserve or reserve bank. Other countries like Andorra, Monaco and North Korea do not have a central bank due to various reasons. The central bank has always been responsible in managing the nation's money supply or its monetary policy through managing interest rates, setting the reserve requirement, and acting as a lender of last resort to the banking sector during financial crisis. In the past years, central banks in industrialized countries have made great pace in the regulation of monetary policy. The Bangko Sentral ng Pilipinas or BSP is the central bank of the Republic of the Philippines. It was established on July 3, 1993 which it took over from the Central Bank of Philippines or CBP. The BSP enjoys fiscal and administrative autonomy from the national government in the pursuit of its mandated responsibilities. And because the central bank is the one implementing monetary policy, which they discuss in detailed, the primary objective of BSP's monetary policy is to promote a low and stable inflation conducive to a balanced and sustainable economic growth. In order for the BSP to better achieve this objective, the inflation targeting framework for monetary policy was adopted in January 2002 after the monetary aggregate targeting framework. Under the monetary aggregate targeting, the BSP fixes money growth so as to minimize expected inflation. However, under the current framework, BSP sets monetary policy so that price level is not just zero in expectation but is also zero regardless of latter shocks (Gochoco-Bautista, 2001).
The inflation rate of a country has always been one of the most significant economic indicators. It indicates how well the economy is doing and how well the economy is going to do in the future. According to the Department of Economic Research of
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