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The objective of price stability refers to the general level of prices in the economy. It implies avoiding both prolonged inflation and deflation. Price stability. But, if inflation is too low, there are also costs of low growth and Deflation (a fall in prices – negative inflation) is very harmful. Arguably targeting a higher rate of inflation can enable a boost in economic growth. it straight from here – which is why there are still links to economicshelp in the linked article. Inflation Rate - the rate of change in the weighted average prices of goods and In the Philippines, the composition of the CPI basket is determined from the that there is a stable and predictable relationship between money on the one hand.
The IT approach entails the announcement of an explicit inflation target that the monetary authority promises to achieve over a policy horizon of two years. Interest Rates — the cost of borrowing money or the amount paid for lending money expressed as a percentage of the principal. Interest Rate Differential - the difference or margin between interest rates such as the difference between domestic and foreign interest rates.
M1 or Narrow Money — consists of currency in circulation or currency outside depository corporations and peso demand deposits. M2 or Broad Money — consists of M1 plus peso savings and time deposits.
Benefits of price stability
M3 or Broad Money Liabilities — consists of M2 plus peso deposit substitutes, such as promissory notes and commercial papers i. M4 - consists of M3 plus transferable and other deposits in foreign currency.
Monetary Aggregate Targeting — an approach to monetary policy whereby the central bank adjusts its monetary policy instruments to control the level of monetary aggregates.
This approach is based on the assumption that there is a stable and predictable relationship between money on the one hand, and output and inflation on the other hand. This means that the reaction of inflation to changes in money supply is stable over time and is, therefore, predictable. The approach assumes that the monetary authority is able to determine the level of money supply that is needed given the desired level of inflation that is consistent with the economy's growth objective. In effect, the monetary authority influences inflation indirectly by targeting the money supply.
Monetary Policy — measures or actions taken by the central bank to influence the general price level and the level of liquidity in the economy. Monetary policy actions of the BSP are aimed at influencing the timing, cost and availability of money and credit, as well as other financial factors, for the main objective of stabilizing the price level.
Examples are the lowering of policy interest rates and the reduction in reserve requirements. Expansionary monetary policy tends to encourage economic activity as more funds are made available for lending by banks. This, in turn, increases aggregate demand which could eventually fuel inflation pressures in the domestic economy.
Examples of this are increases in policy interest rates and reserve requirements. Contractionary monetary policy tends to limit economic activity as less funds are made available for lending by banks. This, in turn, lowers aggregate demand which could eventually temper inflation pressures in the domestic economy. Liquidity reserves - refers to the option given to banks in complying with the reserve requirement, whereby bonds deposited in the reserve deposit account RDA facility are considered as compliance with the reserve requirement.
Moral Suasion — the influence which the central bank exercises to induce or convince banks to conduct operations in a manner that would contribute to the attainment of monetary goals but not necessarily support the profit-maximizing objectives of the banks. The liquidity reserve requirement consisted of market-yielding government securities purchased directly from the BSP. The RDA, which eventually replaced government securities as a form of compliance with the liquidity reserves, allows banks to keep a portion of their reserves in the form of a three-month term deposit in the RDA maintained with the BSP.
Pre-termination of RDAs is allowed, subject to a reduction in applicable interest rates, as prescribed by the Treasury Department. These deposits were introduced in November to expand the BSP's toolkit for liquidity management. Supply Shocks to Inflation — pressures on inflation resulting from shortages in supply and increases in the cost of production without a corresponding expansion in output.
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Examples of these are bad weather, natural calamities and disasters; wage increases not matched by higher productivity of labor; hikes in international oil prices; increases in prices of imported raw materials; and hikes in rental rates. Similar to the last point, moderate inflation makes it easier to adjust relative prices. This is particularly important for a single currency like the Eurozone.
Southern European countries like Italy, Spain and Greece became uncompetitive, leading to large current account deficit. Because Spain and Greece cannot devalue in the Single Currency, they have to cut relative prices to regain competitiveness. With very low inflation in Europe, this means they have to cut prices and cut wages which cause lower growth due to the effects of deflation. If the Eurozone had moderate inflation, it would be easier for southern Europe to adjust and regain competitive without resorting to deflation.
Inflation can boost growth.
Inflation in Philippines a faultline for Duterte's 'Build, Build, Build' ambition
At times of very low inflation, the economy may be stuck in a recession. Arguably targeting a higher rate of inflation can enable a boost in economic growth. This view is controversial.
Not all economists would support targeting a higher inflation rate. However, some would target higher inflation, if the economy was stuck in a prolonged recession. Optimal inflation rate For example, the Eurozone has had a very low inflation rate inand this has corresponded to very weak economic growth and very high unemployment.
The higher the inflation, the more serious the problem is. Germany s, Hungary s, Zimbabwe s. However, in a modern economy, this kind of hyper inflation is rare. Usually, inflation is accompanied with higher interest rates, so savers do not see their savings wiped away. However, inflation can still cause problems. Inflationary growth tends to be unsustainable leading to a damaging period of boom and bust economic cycles. For example, the UK saw high inflation in the late s, but this economic boom was unsustainable, and when the government tried to reduce inflation, it led to the recession of Inflation tends to discourage investment and long-term economic growth.
This is because of the uncertainty and confusion that is more likely to occur during periods of high inflation. Low inflation is said to encourage greater stability and encourage firms to take risks and invest. Inflation can make an economy uncompetitive.
Inflation in Philippines a faultline for Duterte's 'Build, Build, Build' ambition | Reuters
For example, a relatively higher rate of inflation in Italy can make Italian exports uncompetitive, leading to lower AD, a current account deficit and lower economic growth.
Reduce the value of savings. Inflation leads to a fall in the value of money.