Modest Economic Growth Business Cycles
- chain of growth followed by abrupt downturn - usa that were highly industrialized economy
- period of mediocre growth in the last half of the 21st - philippines that is a developing economy
century
Business Cycle
Economic Growth and Structural Problems
- single boom and contraction sequence
- growth above average in last six years - length, time to complete one cycle
- prevents sustained growth for two decades
- structural issues prevent breaking the boom-bust
cycle Boom Phase
- rapid economic growth
Typical Economic Pattern - high real gdp growth, inflation-adjusted
- short periods of average growth
- extended periods of severe contractions and slow Recession Phase
recovery
- stagnated economic growth
- low or negative real gdp growth
Business Cycle
- fluctuations in economic activities Business Cycle
- term for the pattern described in the economy
- high investment
- increase in positive economic indicators
Business Cycle
- fluctuations in aggregate economic activities Business Cycle
- affects entire economy, not just one industry
- occurs in industrialized and developing economies - employment, income, output, wages, profits
- high demand and supply of goods and services
- debtors pay debts on time, high money velocity
Economic System Connection
- interrelated parts in free enterprise network Peak
- driven by profit-seeking businesses
- maximum growth limit reached
- consumers restructure budgets
Historical Context - economic indicators at highest point
- prices peak, reversal point in growth trend
- existed before modern economies
- present in industrialized & developing capitalist
economies Recession
- decline in demand for goods and services
Complexity of Fluctuations - decrease in demand leads to excess supply
- prices fall, economic indicators decrease
- causes vary across countries - producers continue production despite demand drop
- too diverse for a single universal theory
Depression Economic Factors
- rising unemployment - low local salaries
- declining economic growth below steady line - limited job opportunities
- unemployment in the philippines
Trough
Risk of Life-Threatening Jobs
- negative economic growth rate
- lowest demand, supply, and prices - dangerous work environments
- national income and expenditure depletion - need for higher wages despite risks
- work in middle eastern countries saudi arabia, uae,
iraq, kuwait
Recovery
- economic turnaround begins Pursuit of Higher Salaries
- demand rises, supply increases
- positive investment and employment trends - potential for financial stability abroad
- wage disparity between local and foreign jobs
Employment
Family Separation
- rise in employment levels
- positive indicators in the labor market - sacrificing family time for better earnings
- long-term separation due to work abroad
Lending
Youth Perspective
- positive signals from bankers
- increased lending due to accumulated cash - limited growth options locally
balances - younger filipinos seeking work abroad
- desire for a better life and career opportunities
Capital Replacement
Unemployment as Core Issue
- depreciated capital replaced
- new investments in production process - challenges in addressing high unemployment rates
- structural problems in the local economy and job
market
Economic Recovery
- continuous recovery phase High Inflation and Unemployment in the 1970
- economy returns to steady growth
- senator blas ople, minister of labor
- middle east labor market opening
Business Cycle Completion - temporary solution to unemployment
- context: 1970s economic crisis
- boom and contraction phases
- peak and trough as extreme points
Continuing Dependency on Foreign Labor Labor Force Definition
- over 30 years after initial policy - persons 15 years old and over
- ongoing reliance on foreign countries - contributes to goods and services production
- philippines loses goods and services - includes employed and unemployed persons
- countries benefiting from filipino workers
Exclusion from Labor Force
Nature & Kinds of Unemployment
- not working and unavailable during reference week
- understanding causes of unemployment - persons not seeking work for reasons other than
- exploring the persistence of unemployment in the unemployment e.g., illness, disability, bad weather
philippines
Exclusion from Labor Force
Unemployment Definition
- housewives, full-time students, permanently
- age requirement disabled, retired, seasonal workers
- 15 years old as of last birthday
Labor Force Participation Rate
Without Work
- percentage of labor force to total population 15
- no job or business during reference period years old and over
Available for Work Two Types of Unemployment
- available w/in two weeks of interview date - avoidable unemployment
- willing to take up work in paid employment or self- - unavoidable unemployment
employment
Unavoidable Unemployment
Seeking Work
- frictional unemployment
- took steps to find a job or start a business - structural unemployment
- not seeking work due to reasons like
Frictional Unemployment
Seeking Work
- temporary unemployment due to changes in
- temporary illness/disability economy
- awaiting job application results - new graduates (e.g., b.s. economics) looking for
- bad weather, waiting for rehire/job recall jobs
- discouraged workers, no work available
Frictional Unemployment
Proportion of Unemployed Persons
- voluntary job quits for better opportunities
- expressed as a percentage - temporary disturbances (e.g., weather, plant
- total number of unemployed persons to total labor renovation)
force
Structural Unemployment Underemployment
- mismatch between labor force qualifications and - employed persons desiring more work
available jobs - expressed desire for a better employment situation
- california manufacturing corporation relocation from - desire for additional hours or a new job with longer
sucat to laguna hours
Structural Unemployment Invisibly Underemployed
- technology advancements - wants additional work hours
- e.g., pager replaced by cellular phones in the early - worked 40 hours during reference week
'90s)
Visibly Underemployed
Structural Unemployment
- wants additional work hours
- lack of skills in labor force - worked less than 40 hours during reference week
- e.g., need for agriculturists in the philippines vs.
more nurses graduating
Presidential Promise
Cyclical Unemployment - reduce rice prices
- result of inadequate total spending
- unemployment caused by recession phase Political Strategy
- stay in power by keeping rice prices low
Cause of Cyclical Unemployment
- decreased demand for goods/services Standard of Living
- leads to increased unemployment during recession
- high correlation w/ low prices of basic commodities
Avoidable Unemployment
Unemployment vs Inflation
- poor economic performance
- resulting in demand shortages for labor - unemployment as greater problem
- unemployment associated with insufficient demand - inflation has both winners and losers
for workers
Price Rise and Producers
Full Employment
- producers encouraged to produce more
- unemployment rate not 0%
- cyclical unemployment = 0
- natural rate of unemployment Price Rise & Consumers
- consumers need more money to cope with higher
prices
Commodity Prices During Inflation Demand Pull Inflation
- some commodities may fall in price despite inflation - too much spending chasing too few goods
Price Increase Rate Causes
- average increase in prices of consumer goods and - higher demand than available supply
services - excess demand pulls general price levels up
CPI Consumer Price Index Supply Shocks to Inflation
- formula for percentage change - inflation due to shortages or increased production
- indicator of change in average price costs
- based on a fixed standard basket of goods and
services
Supply Shocks to Inflation
Standard Basket of Goods - rent hikes
- hikes in international oil prices
- monitored for price movements
- contains hundreds of consumption items
Supply Shocks to Inflation
Inflation Measurement - bad weather, natural calamities, disasters
- increases in prices of imported raw materials
- excludes core inflation in targeting approach - wage increases without higher labor productivity
- headline inflation monitored by bangko sentral ng
pilipinas
Effect Supply Shocks to Inflation
Inclusions in CPI Statistics Overview - limited or decreased supply
- prices rise if demand remains constant
- retired people
- people below federal poverty threshold
- professionals, self-employed, unemployed Profit - Push Inflation
- inflation due to higher business markups
Exclusions in CPI Statistics Overview - markup, difference between original price and
selling price
- farm families, armed forces
- non-metro or rural populations
- incarcerated individuals, mental hospital patients Real Income & Purchasing Power
- reduction in individual real income
CPI Representation - decrease in purchasing power
- monthly report
- cost of a basket of goods and services Effect on the Economy
- eight major groups of goods and services
- redistribution of wealth
- not necessarily reduce total real income of the
economy
Debtors
Redistributive Effects
- repayment of debts
- different impacts on individuals - paying back "cheap" pesos
- gainers and losers - reduced purchasing power for creditors
Fixed Asset Owners
Assumption of Unanticipated Inflation
- landowners
- inflation is unexpected - gain during inflation
- primary assumption of redistributive effects - appreciation in value of land and fixed assets
Producers
Losers During Inflation
- increase in income
- individuals hurt by rising prices - income during inflation
- higher returns as commodity prices rise
Laborers & Office Workers Deflation
- fixed monthly income - contrast to inflation
- inability to keep up with high prices - sustained decrease in average price level
- diminishing real income
Effects on Economy
Pensioners - harm to producers
- businesses may shut down
- fixed pension payments - decrease in income, higher unemployment
- reduced purchasing power due to inflation
Impact on Labor
Savings Deposits - cutting down labor costs
- leads to higher unemployment
- interest rate may not cover inflation
- loss of purchasing power when withdrawing funds National Output
during high prices
- lower output
- reduced taxes and national output
Creditors’ Situation
Inflation as Balance
- payment received loses purchasing power
- interest payments may be lower than inflation rate - 2-3% inflation ideal
- receiving "cheap" pesos during inflation - benefits consumers and producers
- minimal impact on consumers, incentives for
producers
Bonds & Stocks Investors
- depreciating value of investments Hyperinflation
- loss in purchasing power for investments during
inflation - 100% and above
- extreme inflation
Germany After WWI - central bank act (r.a. no. 265) signed on 15 june
1948
- inflation surge in 4 yrs - establishment of central bank of the philippines cbp
- deutschmark lost value
- currency circulation increase (50b to 500b) CBP Central Bank of the Philippines
- includes rediscounting window
1980 Bolivia - first governor miguel cuaderno
- promote production, employment, and real income
- inflation reached 116% developmental role
- bar of chocolate costs 50,000 bolivian
- sack of money only buys a bag of groceries Presidential Decree (PD) No. 72
- signed by president ferdinand marcos
Printed Money - shifted focus from developmental functions to
monetary stability
- monthly planeloads from germany & britain - expanded cbp's authority over entire financial
system
_________________________________
Monetary Policy
- promotes balanced and sustainable economic
- measures or actions by central bank growth
- regulate money supply to influence economic - par. 2, sec. 3, r.a. no. 7653
activities
BSP Supervisory Role
Monetary Policy
- regulates banks, quasi-banks, and financial
- stable price level, economic growth institutions
- achieve government macroeconomic goals - includes non-stock savings and loans associations,
pawnshops
Tools of Central Bank
- interest rates Currency Issuance
- reserve requirements
- open market operations - issues banknotes and coins
Control Mechanism
Foreign Exchange & Debt Management
- influence money supply quantity
- impact on inflation, economic stability - manages foreign exchange reserves, external debt,
and international stability
Central Bank
- central monetary authority Peso Convertibility
- provides monetary policy directions for money,
credit, and banking - oversees the convertibility of philippine peso
- supervises banks, regulates nonbank financial
institutions
Lender of Last Resort
Central Banking in the Philippines
- provides financial support in times of need
- start during president elpidio quirino’s term
Government's Banker
BSP's Commitment
- official depository and financial advisor
- actions based on future price predictions
- keep inflation w/in a preannounced average rate
Price Stability
Failure to Meet Target
- low and stable inflation rate
- bsp’s role in monetary policy - open letter to the president explaining failure
- certainty in spending, investing, and saving - actions to meet target
decisions
Explanation Clauses for Failure
Financial Stability - volatility in oil prices
- natural calamities affecting economy
- protection for depositors and investors - volatility in agricultural product prices
- prevention of financial institution failures - significant government policy changes
- prudential rules and regulations for financial
institutions Adoption by Other Countries
Efficient Payments and Settlements System - australia, canada, israel, brazil, united kingdom,
thailand, etc
- financial transaction security
- safe, timely, and accurate settlements BSP Policy Interest Rates
- bsp's guarantee for public transactions
- bsp lends to banks
Monetary Aggregate Targeting - overnight repurchase rate
- government securities as collateral
- used in the philippines
- central banks' approach to influence monetary BSP Policy Interest Rates
aggregates
- stable relationship among money, output, and - bsp borrows from banks
inflation rate - government securities as collateral
- overnight reverse repurchase rate
Interest Rate Targeting
Reserve Requirement
- nominal and real interest rates
- affects targeted interest rate levels - banks hold reserves
- based on deposits and deposit substitute liabilities
Interest Rate Targeting - required by bsp for liquidity management
- nominal rate, payment expressed in money Special Deposit Account Facility
- real rate, inflation-adjusted, expressed in goods and
services - fixed-term deposits
- offered to banks and trust entities
Inflation Targeting - available to bsp-supervised financial institutions
- bsp's commitment Rediscount Rate
- framework for inflation control
- bsp lending rate
Framework for Inflation Control - interest rate for financial institutions borrowing from
bsp
- bsp's adoption in january 2002
- explicit inflation target by central bank
Rediscount Rate
Effects
- rediscounting facility
- special refinancing using promissory notes & loan - lower economic activity
papers as collateral - potential lower inflation path
- lower funds for lending by banks
Open Market Operations Contrast W/ Expansionary Policy
- government securities transactions - expansionary increases money supply
- bsp buys or sells treasury bills & bonds - contractionary reduces money supply
- used to regulate liquidity in the financial system
Key Determinant of Policy Stance
Expansionary Monetary Policy - bsp policy interest rates
- increase money supply
- decrease rediscount rate
- lower reserve requirement
- purchase government securities
Expansionary Monetary Policy
- decrease overnight repurchase rate
- decrease overnight reverse repurchase rate
- discourage deposits in special deposit account
- increase bank lending, higher aggregate demand
Effects of Expansionary Policy
- high liquidity, possible inflationary pressure
Contractionary Monetary Policy
- aims to decrease money supply
- decrease in overall demand
Tools of BSP for Contractionary Policy
- increase rediscount rate
- raise reserve requirement
- sell government securities
Tools of BSP for Contractionary Policy
- increase overnight repurchase rate
- increase overnight reverse repurchase rate
- encourage deposits to special deposit account
