TABLE
Sectlon
OF CONTENTS
No
Page
I
Con_ral
B_nklny
3
2
Development
3
Seou_ttzes
4
Money barker
39
5
Interest
53
5A
The Interest
5B
Effec_ of Interest Rate Regulatlon and Savlng Behavlor
Finance
Infl_tlon
7A
Food Price Changes Spurts
Savlngs
31
Rate qt_ueture
7
8
15
Rate
Money Supply
Lonp-Run
Segmentatlon
Market
6
7B
and Ma_<et
59 on Credlt
Allocation 73
Functlon
81 95
Prlce
and Other
Causes
of Inflatlonary 97
Movement
in the Phlllpplnes
102 and in the Rural
Seeto?
108
LIST
Table No
OF TABLES
T i t 1 e
Page(s)
I
Str_/cture of the Flnanclal
System
2
_hanges in G_oss 1951-74
Assets
3
F1nanclal
of th_ Pr_te
Annual Average Nomlnal and Real Interest lected _ssets, 1956-74 Rates
Regulated
5
List of Bonds Issued 1965-1970
Rnte_
Fo_
Se60
TheiT
61 Maturltlcs
Rate, 66
End of the Month Average Yield Bancom Bllls_ 1966-I_70 Money
and Interest
Market
on Treasury
8
Statutory
9
1972 Effeet!ve Lendlng Rates for Secured Flnancmal Instltut1_ns In Pet Cent
and Effeetlve
Interest Rates
and
Rates
69-70
of Interest
Factors Re-Don Orlg_n 19_0
_ble TOT Movement 1969
Consul]el Pr,_= (lq72=100]
Index
_nd
Bills
67
Comparatlve
11
rotor
of Interest
7
10
23-24
48
4
6
J974
71 Loans
in Money
of 5 72
of Internal 85
_oney _upply
Index iQ4g _n7_ 96
12
Decomp_sÂąry
_he Consumer
13
Phlllpplnc_
Factors
14
ComFn_atlve
Estimates
15
Pe_centag_ D1str_butlon and bV Income Croup
Prlce
Affectln_
Infl_t_on
100
Inflatlon
107
of Savlngs of Asset
1951-1Q00 Acaums_tlon
111 by Source 117
The literature much
the historical
of credit
on Philippine
development
and related
from their graduate question
economic
Philippine
from the United
Central
Bank (CB).
and Cuader_o's
problems
of the Philippine
own writings
of development
finance,
and independence,
and to exe_else
source
fom development.
of finance
As the system assets,
it also became
has achieved larger, Twelve
happened
financial
issues.
i.e._
central
the first
wi'_h these panel.
similar
restraint
in size
The missions'
in monetary
to study.
and more varied
offices
composed
the system
are scattered economic
Mission-type
studies
coordination
expansion
were
presence
and
market of
institutions. TO date almost
the country. available
dominating
as a
of institutions
in 19_6.
all over
students
of the
The financial
financial
of the
missions
perception
and in variety
and
gover_or
the need to balance
challenging
banks
that more Filipino
contemporary
showed
and what
made by invited
growth as shown by the[ physical
number
(12) co_ercial
a thousand
more
substantial
and greater
grew
studies_were
closely
home
the very basic
and by Filipino
He worked
expertis e
returning
the Phil_ppines
Cuaderno,
very
and the evolution
of economists
suits
States
reflects
the growing
dealt with
These
Among them was Miguel
as chair_nan or as head
_eports
works
bank to establish.
missions
othem bankers.
either
Early
numbem
of what type of monetaz_y system
type of central
market
It also reflects,
increasing
studies.
and credit
of the financial
policies.
in the field with a slowly
money
It also
to write
the literature
on up
to the early 60s have been empirical
works.
including
money
empirical
studies
deposit
Since 1970, supply
however,
statistical
functions,
rural banks,
Mainly
used and some of the series
important
had rathem
The studies
and many been
hs_yet
touched
mediary
narrow
country's
no empirical
market
literature.
by available
base.
choice,
Moreover
They were written
most
and care in the
This
not accurate. the
reasons
with each
to specific
policies
that have not
rate structure,
inter-
flow.
approach
will be the more
is the first
of the studies
in response
Bank were
for these
are many areas
interest
A
The studies,
rate were
Partly
and capital
at this time.
that for
to take into account
oriented
There
and
choice.
or are inconsistent
very much
segmentation
review
on the
are historical
to the issues
in
of the time
and
expertise.
The literatur_ banking;
and failed
feels that a historical
one to use
perspective.
on interest
by
come out
including
and portfolio
building
in the market.
were also
market
data from the Central
are not conclusive
The writer interesting
in model
focus
models have
also undertaken.
secondary
such as portfolio
behavior,
were
or even replaced
flow of funds analyses
savings
like that
inter-relationship
some of the findings other.
_ural
from lack of rigor
analysis.
The studies
three
macro
like the money
works on inflation
suffer
supplemented
five monetary
of sub-sectors
substitute_
few empirical
substantially
2) development
is organized finance
into six topics
and market
-- i)
segmentation;
central
3) sub-sectors
3
securities 5) money
and money market;
supply
function
and price
in 6 is the very important analysis
sections
finance
follow
Central
is written
the mope
of its policy independence
properly
begins
and
6) savings
flow.
on central
as a historical
Included
and Moreno's
paper.
(1976)
banking
and
The rest
of the
Peview of literatumeo
States t.
administer
such government
independence, normalizing
conditions
terribly
was the Central
banking
of government Filipino
during
obtained
effo?ts
Among
missions
World War
were
period.
institutions
the first major
wrote
after
trained
needed
to
Upon assuming
concentrated
on
to undertake
institutions
estaB-
(CB).
60s was almost
finance.
II just
the
already
of the new government
up to the early
its
Fortunately,
the Commonwealth
and development
and three other American
and the evolution
to adopt, patterned
leaders
Bank of the Philippines
The literature central
devastated.
and establishing
responsibilities.
Bank
States on July 4, 19_6.
Moreover,
therefore,
Central
when the Philippines
had a ready system
the United
with
and structure_
of Hooley
of the Philippine
f_om the United
Philippines
lished
regulation
The section
conventional
and left the country
specific
rate
Banking
The history
ended
level;
contribution
of the flow of funds.
development
i.
4) interest
_otallyconcerned
The 1947 Finance
on thekind
of central
Commission bank
that ,, }
suits the economy
and alternative
methods
of financing
economic
develop-
4
merit.
Governor
These were
Cuaderno
later compiled
_tabilliTf' and Progress Central
wrote
Bank (1949)_
merit (1960). relationship
numerous
and published
(1955).
He also
and a memoir
The latter recalled with successive
lectures
on the same topic.
in his Guideposts wrote
entitled
a primer on the Philippine
Problems
his experience
Presidents
to Economic
of Economic
as a Governor
of the Republic
Developand his
from Roxas
to
Garcla.
The Joint Philippine-US September mended
1946 by agreement
the establishment
the American Philippine
Finance
of the Philippine
of the Central
panel while Secretary
group.
The Commission
monetar_
system
government.
governing exchange
under
of using a gold-exchange
World War II Cuader_o monetary were
systems
therefore
standard
"taxes,
the authority wrote
standard.
was sent by President
that the country
not the first
from gold exchange
budget_
and trade
might
public
problems,
reconstruction
dealing
bank.
Quezon
tO study
It
with the
And at the outbreak
system.
to
debt,
of a central
a volume
adopt.
and
was the establishment
of the
alternative
The Commission's
made for the transformation to a managed
the
It was also asked
recommendations
is to be noted that in 1937 Kemmerer p_oblems
headed
the financial
policies
of a managed
G. Crossman
to study
specific
Among its major
Edgar
was created
recommend
and development".
Bank.
recom-
headed
of the Philippine
reform,
and US Government
in
Cuaderno
problems
and banking
organized
of Finance
budgetary
currency
Commission
efforts
of the monetary
The Commission
began
its work
in mld-January
same year.
Republic
was passed. monetary
The Central
Cuaderno
Cuaderno of a modern Central
Act 265 otherwise
made
monetary
a considerable
system
difficult
first efforts
at economic
P_esident
charter
for a central
system째
(Cuaderno, experts
and Henry Triffin (1946).
period
bank
1949)o
assigned
central zation.
banks.
Cuaderno
2_ 1949
suitable The latter
changes
Triffin
Reserve
Reform
of central
to Philippine
to their
in the currency
them were Robert
more
needs
Board
(Fed).
in Paraguay" of David
bank째
development-oriented.
are !im_ted
a suitable
central
the Federal
are in general
Commission
and consulted
to the recommendation
models
a
it during
the Finance
to devise
_'Monetary and Banking
were
He nurtured
necessary
Among
conceive
from the war and its
then wrote
States.
also referred
Their powers
needs째
Cuaderno
and suggest
who were both with
of these countries
these to be more
to a managed
to the formation
Even before
also from the Fed for a Guatemalan-type banks
Bank Act
January
He helped
of reconst_act_on
development.
Roxas
had just written Cuaderno
operating
in the Philippines째
in the United
Wallich
shifted
contribution
su_t the nation's
the country's
banking
25 of the
as the Central
the country
Bank started
April
as its Governor.
Bank that would
was formed_
its report
known
By this Act in June 194_
system.
with Miguel
1947 and submitted
Grove
The central
Cuaderno
deemed
than the Western
concerned
responsibility
with stabilifor stab_lizationo
6
The specific missions
was the degree
and degree
of reliance
expenditures.
with
projects. raging
Roxas
central
agreed
bank.
the fiscal authority
influencing
the allocation
sectors.
credit
LDC's typically
payments.
component
of domestic
have more
money
effectively
independently
Central
the level,
cost and allocation
flow of foreign security
issues,
a depository
serious
thus making
of fiscal
is thus responsible
exchange. control
of money
It is also and assist
of govez_ment
The Commission
to
system by encou-
expanding
the level
assets
and
projects
on balance
it sensitive LDC central
constraint larger
to changes
banks
cannot
agencies.
institutions
The
to decide
foreign trade
to support
or
of
form a much
and empowered
financial
a
of development
and planning
expected
_eeded
be a_ important
and credit,
authority
for government
desirable
problems
For these reasons
Philippine
and the
has to work more
or financial
to socially
are found
supply
forms.
Bank
institutions,
intez_national reserves
in fomei_nexchange operate
bank
the financial
instruments
of credit
Moreover,
source
for the financing
Their export earnings formation.
finance
Such a central
of financial
of available
Cuaderno
that the Philippines
The Bank has to help develop
aBd variety
most
of the Bank from fiscal
on non-inflationaraj
the establishment
capital
that concerned
of independence
President
development-orlented closely
issues
on
and the
government and serve
as
funds.
devoted
The first was on government
two chapters
borrowing;
on development
the second on the need
financing. to expand
on
7
and develop
financial
institutions.
and The Rehabilitation system.
Finance
Of the twelve banks,
and of The domestically by American
Bank
incorpomated,
bank.
nature
other
already
borrowing
receiving
expected
domestic
against
borrowing
with
yields
The securities
community.
money.
It advised
Apparently,
develop
and liquidity
would
become
Philip-
only one regular _eflects
well
the Trading
will rely on sources are foreign
The Commission
press
it argued
was not strongly
the mate of government the securities
marketing
an important
work
fom
invest-
market.
It
of govergJnent securities This,
according
portfolio
tackled
to the
being
fo_m of saving
to give attractive
the first Commission
bor_ow-
but this source was not
and unvaried
the government
serve
These
features.
the small
of banks
one
That time the country was
Though
to increase
to help
banks
enclave.
the Government
the extensive
Report, would help augment then.
Trade
its expenditures.
as a means
recommended
attractive
of ownership
the 50s.
of foreign
This leaves us with
The use of the printing
ment and more importantly, specifically
that
the financial
owned by the Chinese,
Foreign banks
and printing
beyond
composed
banks
The government-owned
a large inflow of dollars
To continue
explicitly
then,
foreign
than taxes to finance
ing_ domestic
Church.
of The economy.
It was anticipated
(RFC)
two were
The pattern
of the indus_ial
time 12 commercial
five (5) were branches
(PNB) existed
private
The colonial interest
Corporation
and two by the Catholic
pine National indigenous
At that
marketed
for the
interest
rates.
less contro-
8
versial shift
issues.
It mainly
from a gold-exchange
recommendations were
followed
June â&#x20AC;˘ 1948.
provided
the institutional
standard
to a managed
on the Bank's
objectives,
by the government
Concerned
Ting a managed
when
monetary
system
under
not deal with some of the major credit
control
important
Took a comprehensive It set guidelines
survey
Finance Research
Their report
focused
panel
expenditures.
undeveloped.
the Central
Bank Law in
control,
like interest
it did
rate and selective
the Bell Mission
was headed
Revenue
by Edward
implications
both being
Cuaderno
to avoid the experience
then head
Monetary
Fund
system level
inflation
could of
tO lend TO the
for gove,rnmen_ securities advisers
of
over 5 per cent only.
be pressumed
and the American
(IMF).
of payments _
on this source
taxation
of
inflow of U.S.
and expected
to GNP ratio was a little
high
of the Philippines.
on The balance
that the existing
of having
of the country.
capital
very dependent
and the market
of 1950 under-
Bernstein,
war-related
that the Bank would
if taxation
policies
of The International
on the dwindling
esZimated
conditions
of future
upon to pay for the prevailing
IT was anticipated government
and powers
the cenTal bank
of the economic
Division
budget,
The Mission
no_ be relied
Its
issues of institu-
mission,
_This trend had direct
and the national funds.
system.
and fundamental
issues
for The direction
the Economic
dollars.
for The
policies°
A second
The Mission's
monetary
responsibilities
it enacted
with the broad
framework
cautiOned razes.
m em_ined
the Philippines
Their
report
9
repeatedly mended
admonished
instead,
highem
It also recommended through
against
tax rates
conditions
the Philippine
the raising
_nflationary
Council
of comporate
type of financingand
for income
and specific
commodities.
development
aid_ _anted
for America's fomUoS.
income
recom-"
Aid (Philcusa)
tax and indirect
one of which
taxes
on alcohol
was
and
â&#x20AC;˘tobacco._ /
Cuaderno
was a conservative
that stability
was a pre-requisite
most
deter_ents
important
countries
to the Thimd National Hotel,
February
less developed bank
which
premise,
private,
and disappointment"
he stated that V'the basic
is the saving
Development
granted
resorted
economic
for use in the prosecution
Capital_
that /
who firmly believed
He felt that
bank
In his speech
and Producers,
... '_In almost
legitimate
of an investment
of the community..."
use of central
the experience
(1955, po 158-159). source program, (Speech
Manila
ever,] case of the
to the unbridled
development,
one of the
in underdeveloped
credit.
of Manufacturers
26, 1955 he argued countries
banker
development
use Of central
Convention
credit for financing
one of failure
of growth.
of economic
was the reckless
central
has been
As a general of capital
whether
funds
public
on Sources
of
1955).
l--/TwoHundred Fifty million dollars ($250 million) was to finance development projects over a period of five years.
or
i0
Cuaderno's maintaining fiscal
a balance
coordination.
memoir between
central
Because
the central
was development-oriented policy
more direct
has to exist through
in the Monetary National During
Board,
Economic
President
administration, National
During
the President's
Chairman Govemnor
central
bankers
like Bernstein
Federal
Reserve
Board.
occasions would
his success
according executive
depends
economic
to Castro a_
(1971)
of Finance in the
policy-making
agency.
Garcia's
Bank became
an issue.
a moreaggressive
resisted
deficit
on the dangers
be concluded
financing.
of inflationary
to the advice and ExZer
of eminent of the US
that the Governor
inflationary
finance.
by his offer
relation
succeeded
In several
of resignation.
set-up
on the personality
on his personal
and monetary
of President
wanted
he referTed
was accomplished
very much
of fiscal
of the IMF and Grove
against
for the Philippines
of the CB Governor
thus seem that given the organizational
independence
chosen
of
and monetary-
of the Secretary
strongly
concentrated
It might
his position
Araneta
Cuaderno
To bring home his point
in maintaining
bank
of the Central
Council
this time his lectures
financing.
independence
and the first year
the independence
about problems
coordination
and the membership
Council,
policy.
bank
the membership
Magsaysay's
Economic
financial
was very insightful
of the Bank,
It its
of the governor with
and
the incumbent
2/
_'Apparently, he enjoyed personal rapport with Presidents Roxas and Qulrino. There was little pressure on him during their inhumbenCy. Conflict in policies was experienced during Presidents Magsaysay and Garcia administration in which he used the threat Of resignation about five times.
ii
The success
of Cuaderno's
fast pace of reconstruction industrialization practically increased years
moderately
lO years of
This record
history
to the high inflation
Cuaderno
rate
government
seemed
inflation Price
explains
and again
of other
The market
price of
reaction
in 1978-79.
spending
The recommendations
remained
of the undeveloped.
as the main buyer
made no statement
post-
degree
was a strong
the development
the use of the CB window Cuaderno
was
level
stable
with a deficit
problems.
regarding
and
The last three
Filipinos' There
to be preoccupied
were not followed.
issue_o
of income
A tradltionof
years.
of 1974-75_
by the
in LDCs and the whole
determining
in succeeding
of the 1947 and the 1950 missions
This mainly
Moreover,
was exemplary
probably
his ter_ to the neglect
market
rate
developmenZo
of the Philippines.
of inflation
securities
_owth
at less than five (5) per cent during
may have been established
during
rapid
may be evidenced
of about six (6) per cent.
of his term.
tolerance
and fairly
nil in the first
independence
husbandry
on problems
of new
of marketing
securities.
There were no discussions the financial banking
market.
was adopted
activities in, flared development
A program
to meet
banks in 1958.
policy
rural
requirements
and specific
of rural banks The
on the desired
for developing
the financial
such as agriculture The establishment
either
direction
and development of priority
industries.
Cuaderno
in 1951 and The expansion
followed
of
however,
of
may be considered
12
highly
segmented
p_esent
in orientation.
and has attracted
some criticisms
It may be argued on interest
rates probably
and financial rate.
rate regulations instruments saving
were
changed
ceiling
or choosing
governments according
sets of
of central
banking
The rates on saving, and
were
no rationale
-
These
imposed
between
for setting
and
1976 and
deposit
rate
these levels.
control
rate was set as an instrument
of e_edit.
credit priorities.
The rates At first
banks
to priority
of quantitative
differed
depending
the discount
institution.
rates
In 1952,
percentage
activities
Beginning
points 1959_
loans
set
the rates
were
hanks.
in 1954 then increased
these
-- for ag?iculture
5 pe_ cent and other
on the
were
and 1 1/2 per cent for,rural
lowered by one-half
cent_ export bills,
on three
4 and 5 per cent in 1964 and 5-3/4
100 per cent in 1957.
according
on interest
set of interest
rates
and discounts.
to the type of financial
These were
Interest
New regulations
2 pe_ cent for con_ercial
by over
loans
Bank offered
The discount and selective
controversial
those
on economic
policy
from the veTy beginning
at long intervals,
The Central
impact
first set at 3 and 3-1/2 per cent in 1957.
6-1/2 per cent in 1966. 1978,
Bank regulations,
is no explicit
was laid in the 50s.
were
in the later years.
Central
fo_ the currently
and time deposits,
to be used up to the
the most profound
Yet ther_
were, controlled
time deposits
that among exert
activities,
The foundation
This Continues
rates were loans,
set
4 1/2 per
6 1/2 per cent.
In 1962,
13
additional discount
priority
industrieS:
Marketing
faz_ning, fishing,
cassava,
and veneer
not allowed
rate
of 4 per cent which about
rates.
controlled
at higher
Beginning
allowed
Board,
rates,
ceiling
rates were
on interest
and drug manufac-
deposit
by demand
issue
rate.
of medieval
Law.
on secured
issues
thedeposit
on Treasury
Bills
set by the Monetary The Law set a
and unsecured
to VanAtta
value
a fixed
forces.
rates were
According
offered Subsequent
the yield
the 1916 Usur_
securi_
since prices
following
and supply
and deposit
rates to be charged
on the basis
bond
and therefore
set by
on government
loans
(1970)
that "usuriOus"
this
rates
sinful.
Mapa 1960
(7) preferred
up to its maturity
equaled
at 12 and 14 per cent respectively. Law was enacted
textile
also approximately
1968_ prices
to be deter_ined
lending
and seven
yield
The first _ublic
While the discount
were
(NAMARC0)
The rate on an issue was fixed
were offered
The
and plyw0odindustries.
Bank also
tO vary.
rate schedule.
of 3 per cent for loans to
food processing,
were
were
to the discount
low rate
Corporation,
The Central ties.
added
rate was set at the very
the National
turer,
areas were
(1961) and Van Atta
the rates prevailing
probably
therefore
argued
in the institutional
less than the corresponding
rates were
(1870)
ineffective
Central
that until
market
were low and
Bank ceilings.
and did not distort
about mid-
The ceiling
the allocation
of credit and the flow of funds. in very liquid privileges
position.
not used.
discount window borTowing
enough
Excess
reserves
Mapa further
until 1957.
banks
were
observed
He noted
were
the p_evailing
rate or discount profit
minimally
margin.
_ates
that the low demand
and discount
that in 1957, private
maintained
8 per'cent
excess
banks
reserves
These observations
for funds was small
bank's
CB loan to banks.
of 3 to 4 per cent offered
Bank.
to be
that only the PNB used the
loan rate of about
Yet, banks
from the Central
obsemved
maintained
f_om the CB was only 10 per cent of total
The margin between deposit
Commercial
and a wide
and borrowed
led Mapa to argue
at the then prevailing
rates.
t
The institutional the ceiling evidence
setting
on loan and deposit
mates
to prove that the market
Secondly,
the financial
system
of institutions
publicly-supported
banks remained
for selective
There is a much privileges direct imposed
Pate
dominant
of regulations
All financial
papers.
rates on deposit
the mid60s.
effective.
There
in volume
However,
and continue Bank
public
is enough
institutions Ceiling
as well and
to be important
intervention
on interest
substitutes
First,
than the legal maximum.
expanded
Central
of the monetar,y authority.
on interest
since
is higher
and claims.
control.
larger number
and portfolio.
control
financial
credit
became
substantially
as in the variety
media
changed
rates,
increased. discounting
now fall under the
rates
have been
and other
short-term
iS
2.
Development
Finance
Recent policies.
literature
But on the whole
specific
policy
In this sectionwe
how they affect work
impact
the studies
of policies review
from Gurley
and
Shaw
in
works.
their
the literature
borrowers
analytical
frame-
from the viewpoint
of intermediation. thesis
of
This frame-
and applied
surpluses
in
to segmented
to _urplus
allocation
In the process
sizes of many units
different
his portfolio째 sizes
may supply
ame channelled
specia-
into a large
distribution
which
of it at much longer
maturities.
of claims
to
of intermediation
forcas of credit.
a variety
other
results
of credit
lenders.
maturity
The inter-
It may lend to different
and different
to lend in different
and
Intercnedia_ies
liquidity
to lend portions
Finance,
of intermediation
units.
by
was analyzed of
of the fund placed by individual
can diversify
the intermediary
a Theory
and better
This fund has a certain
than the maturity
it p_ofitable
mixes
and lending,
the inter_nedia_
borrowers,
Mongy
liquidity
of d/fferent
pool of funds째
in development
They show that the process
and portfolio
in borrowing
mediary
impact of
It will be helpful
from a common
and Shaw's
volume,
in lower risk, greater
permits
partial
(McKinnon),
subsequent
lize
consider
of many of these
and regulations.
The role of inter_ediation Gurley
the implications
the size and efficiency
is borrowed
markets
Segmentation
analyzed
or set of policies
to view the complex work.
and Mamket
types
of
It may also find On the othe_
against
itself
hand
in order
to
attract
more funds.
and assets.
to surplus
mediary.
The pooling
portfolio
also permits
of the assets
of numerous
the intermediary liquidity
should_esult
in lower
is
intermediaries.
hot-cowers of the inter-
funds
with
is also assumed
in the acquisition
of inter_ediamies
into an intermediary
to guarantee
increases
oT both liabilities
the issuing
to the composite
together
Specialization
scale pamticularly advantages
lends
In general
for claims.
in risk
by diversification
units' claims against
lender indirectly
liquidity.
is reduced
The reduction
transmitted Each
Risk
its debtors
_eeater
the size of the market
to result
in economies
and use of information.
cost of bomrowing
of
All these
and lower
risk on
J
The portfolio
holding
of lenders.
Of greater inter_ediation investment of assets.
model
is the reduction
choices.
A surplus
A deficit
choose better McKinnon
importance
ter_s.
gave a very simple segmentation,
unit
any amount
Dependence
and clear
exposition
B faces a developed
Assume A has U function
finance
of this result
capital
reflected
facing
is relaxed. in his different
0, i, A is dependent
on
market.
in the indifference
UI, A U2 A ,.. and pmesent
income â&#x20AC;˘ Y0' A
saves and invests
_0 A and obtains future income C_.
u
and buy a variety
Let us take two investors
internal
and
and also be able to
on internal
choice over two time periods,
0f financial
in portfolio
can lend any amount
investment-saving finance,
contributfon
in indivisibilities
unit can borrow
borrowing
of market
than the above
His optimum
point
curves
is Qiat which At point
he
QI the
17
time preference equal
to
rate and the marginal
is available. %echnlques
technology
and b'etween inter_al
the alternative
1 + r
on market on
line,
0B
MM.
ing and lending
direct
the impact
a higher
curve Y0 A _li_i[l
the lending-borrowing
Being
A traditional
People
easily
and have no. eni!_epreneurial
buying
financial
assets.
a higher
returns
1 and assume household
which
ability
It is important
level of
on portfolio
The optimal
income,
are better
a
his-saving
a h2gher
to have
the borrow-
facing
the tangency,
with small
the
to his investment.
Off by diversifying
_0 - IA from
than
on 0B transfommation
Chart
,.'.lendingIoC02 curve.
use
all the arguments
he can attain
AA at
boz%_owing curve and Y
rate to be
curve,
of intermediation
be b ette_
investment
Let us
rate is lower
and lending to the inter_nediary.
A's case are direct
IC
given
absolute
Let us take
rate a_e equal.
investment
more.
a much higher
unit.
financing.
rate is lower
and investing
for the surplus
the two alternative
FcB0.
of the investor,
did not conside_
productivity
level of investment
and the lending
As long as The bor_owlng
natural
by borrowing
0B
B can reach
the lending
curve allows B to obtain
choice
a larger
external
to be
curve and borrow
for inter_ediation., time preference
and/or
technique
Presumably
McKinnon
requiring
B can avail of this and choose between
assume
utility
of investmentare
i + g.
Alte_native
technique
productivity
points
in
of the lendingIC is Tangent
unable
to
to bor_ew
off lending
assets
i_to
in small
or denoml-
18
Y1, M
_l+r • &{/
0
"
• __
Y1 ..... _<. C_I
_ "\__ -_i:_ _,_o
B CO
F
Chart
1
A .COl
A I0 A C02
.-_ u_
A Y0
nations
in an LDC assuming
The surplus
which
they can lend will
These expected rationale earlier
benefits
for some development
and which we will
as a whole have inefficiency have
that majority
conflicting
in credit allocat_on
policies
pPovide
the
that we enumerated
detail below.
on inter_nediation and pomtfolio
The policies
leading
choice.
to possible
They also might
lead to new forms of segmentation.
Placido
Mapa's
doctoral
first study on development area_
He traced
existing
the development
agencies
deve!.oplnent market
finance
then - commercial,
lized credit
were
from intermediation
in greater
impact
have small incomes.
also be â&#x20AC;˘small.
finance
review
of_households
established
to 1959_
of publ_c
by law to serve
of rural banks
to cater to small producers funds into the banking (DBP) was established Co_poration
(RFC).
is the country's
a ma_o_ work
type of financial
development
banks
- giving
An important
the economy's
institution
quantitative
segment
of the financial
institutions.
particular
providing
all over the country.
These
sector.
areas
and encourage
The Development
in IB54 _eplaeing The reconstruction
These
credit
Bank Act was passed
in _umal
in the
and a few specia-
their
and publ_cly-supported
In 1951, the Rural establishment
of each
rural,
(1961)
and has remained
of the government
f_om 19_9
consisted
dissertation
needs.
for the
were
intended
the flow of surplus
Bank of the Philippines
the Reconstruction
and Finance
period was practically
completed
z0
by early 1950. priority
of industry
of the govez_nment.
industrial National
Financing
activities.
The DBP was to pmovide
In 1955,
Bank, was amended
the 1916 charter
allowing
investment
functions.
In 1958, the
of private
development
banks
public
banks.
Rural banks
are subsidized operation. ment
this public
and private
credit
and the Agricultural
the government
the commercial
during
agricultural
development.
real estate. percentage cent.
directed
banks cannot
The increased
credit
Credit
like
By 1959,
rate of credit with
(Mapa, 1961, p. 126).
still
came from the three government
they granted
the National
and Cooperative
allocation.
Mapa observed
credit
for industrial
a total credit
for Develop-
credit
for industry
allocation
credit
rose
to industry
management
of about
that and went
to
continues
to 26 per
was due to
links
of private
and govemnment-supported
finance
through
and an insignificant
But the bulk of funds
in development
but
Administra-
medium
46 per cent of their
ownership
tries
Their importance
are private
and funds
the main financial
provide
In 1954,
of new banks
banks
this period.
solely
to agriculture.
bank some
for the establishment
development
0nly 9.5 per cent were to industry
the mushrooming
70s,
commercial
Both DBP and PNB are purely
agencies
The PNB and the DBP became which
credit to priority
Bank for capitalization
Other specialized
tion were also established
was then the new
of the Philippine
Law providing
was passed.
by the Central
Corporation
and agriculture
to indusinvestment banks.
to the present.
40 to 50 per cent of total
In
21
credit
granted.
in the market,
But while these public
available
to activities
no access
to institutional
tive development the development
institutions
not financed credit.
of commercial,
institutions.
financial
development.
His thesis
Mapa
the volume
commercial
then focused A chapter
development
contains
rates.
banks
banks
to
and othe_
detailed history
rates
were
of
found to be influenced
by the different
has also attracted
or had
on the quantita-
This fact profoundly
cost of credit suppl_ed
of credit
each was devoted
a more
Cur_ent!y , the ceiling
The phenomenon
were not intervening
expanded
by private
rural,
lower than market
the level and relative institutions.
rate ceilings
of these institutions.
financial
substantially
interest
financial
a lot of interest
in the
70s.
There is a long interval works
dealing
repomt
with
financial
between
development.
of the Financial
System
A large part of the report was devoted Shaw's
theor_
of finance
tions of the various
and Central
Central
and they should
Bank
therefore
for more effective
(1972) w_ote
of the Philippines, to a discussion
monetary
1950-1970".
direct
policy.
and
on financial operadata on sources
were presented.
for_ a very large
be under
a
entitled
of Gurley
Secondary
intermediaries
intermediaries
and subsequent
Commission
Bank megulations
and uses of funds of bank and non-bank
the market
Sur_ey
types of intermediaries.
His point was that non-bank
study
Gallardo
for use by the Joint IMF-CB Banking
"The Structure
Mapa's
control
segment
of
of the
The system wis shown
22
to grow very rapidly in nominal He also
commercial
bond
that deposit
l_abilities_ere
and thrift banks liaDiliti_s
issue.
only.
Rural banks relied
aggregated
that monetary
finance.
and non-bank
control
was adopted
ments.
of its 1978 Country
more narrowly
The chapter
focused
provided
Report
In 1950 less than 15 commercial
existed.
These
types
the rela-
in order
Bank
to argue sector.
in 1972,
done by the
for short-term
description
This
instruw
of the growth
of financial
institutions
banks
87 branches
formed the bulk of the market
below shows the market
in showing
problems
on the Philippines.
empirical
1962-71.
reproduced
and other
recently
on the market
another
has not been
and a_e highly
to this financial
finance
and size of the different
intermediaries
sources
by the Central
in number
bank
these financial
institutions
extend
A third study on development World Bank was part
also gave data on the
sector by
lies mainly
should directly
depended
and DBP on l0 per cent
Gallardo
financial
banks
established째 composition
for
the latter on
on the allocation
His interest
this recommendation
was however,
a third
industrial
and so shed no new light
tive sizes of bank
In fact
on about
These data are from secondary
of development
source of funds
and development
liabilities.
of credit by broad
institutions.
Rural
a major
_owing
at 23 per cent.
- the for_,er on CB accomodati0ns;
of their funds from deposit allocation
institutions
term at 50 per cent per year and non-banks
showed
on other
from 1960 to 1970 with banking
having
as the Other bank Table
f_om
and non-
1 of the Report
in 1961 and 1972.
Now a
_ •
(o
=
,PI I_
I_
_
0 Pt
' !
_m
_
I
o_
0
0,.-I _Jo 01 r-I
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25
much
larger variety
of institutions
1961 and 1972, new important Development bank
Corporatlon
began to operate
other
investment
dominated
in 1964.
until
Savings
viewpoint
explained
partly
by the Central was
also
of assets
and failed
credit
and their supply.
development
banks.
for their initial
higher
Bank째
than other banks.
two public
banks,
activities
and quantitative
institutions
ratio
policy
used
development
extremely
their
allowed
loanable
and
favorable funds. from the
them is generally
rate charged
of money
for new fOrthS
may be obtained
DBP and PNB are used as media expansion
may be
such as the mural
granted
equity requirement
The discount
of financial
of demand
of the financial
and to augment
The discounting/loan
from the
of g-_owth of the intermediaries
These have been
capital
has remained
intermediaries.
development
to the growth
_le thrust
and
or thrift
that the pattern
rate
investment
mainly
the pattern
impact of,the
specialized
Up to 50 per cent of their Central
speculated
in response
policy was to subsidize private
to analyze
The relative
partly
development
Private
by Baucom
however,
established
Between
The
the first shortly
The market,
considered
by the selective
Bank.
(PDCP),
and government
Tan (1974, 1976)
established.
and loan assosication
the 70s.
banks
geographically.
This was followed
The World Bank Report
development.
were
of the Philippines
by commercial
quantitative
spread
institutions
companies.
banks did not develop
have
is lower.
for financing supply,
The priority
26
While generous credit incentives are granted to these public or semi-public institutions they were more effectively Covered by the legal
ceiling on loan and deposit rates.
Other financial institutions
in contrast were more innovative in issuing instruments not legally restricted by law om Central Bank rules.
This policy on financial development has been criticized by Tsiang (1975) and Tan (197_
1976).
The credit and interest rate policy
on commercial and rural banks has virtually given them opportunities for earning monopoly profits.
In Tan's work she enumerated and described
briefly the various forms of intervention on financial institutions. These are regulations on their establishments, portfolio ratios to be maintained and the rates of interest to be paid on deposits.
The
controls imposed seem not to be consistent with the objective of developing the financial market.
Examples Of these are: commercial and rural
banks are given discounting incentives for expanding their loanable funds.
At the same time they are restricted from offering deposit rates
high enough to attract placement of savings in deposits.
In response to
these two inconsistent regulations, banks _elied on discounting rather than to borrowing larger amounts from a bigger number of depositors. This is specially t_ue of rural banks which are allowed lower discount rates than the ceilings on deposits.
A second inconsistency Tan cited
is the policy to expand credit while simul#taneously fixing both loan and deposit rates at low levels.
Excess demand for loans at the ceiling
27
rates Then occurred°
In response
to excess
institutions
charged
effective
differential
between
the effective
hidden
in service
banks.
Public
charges
higher
supported
followed
banks
public
_nstituati0ns are charged
ter_ loans predominantly
granted
Pates.
of funds
A smaller
volume
at the prevailing freely-operating
ceiling
tions on discounting policy
curve is assumed funds DD. rate
and interest is analyzed
have been
Perverse
ceiling,
by
Shorterh_gher
from surplus
collected
on
struc-
granted
are charged
The monopoly-llke rate.
The effect
graphically
below.
rates on deposits
rate for loan as _i' rate re .
at the fixed rates.
If banks
they are able to earn profits
higher
banks
to be
term loans
term loans
the legal
The
in the lending
longer
are thus collected
interm_diation
than the equilibrium
are able
were supposed
on rates_
Longer
by private
then would
discussed
including
Ceiling
and ceiling
results.
rates.
units
in a more
market.
S.C. Tsiang
discounting
giving
megulat_ons
rates therefore
financial
rates
of loan proceeds
ture of interest
financial
Than the ceiling
and ceiling
and retention
and publicly
The other hand strictly
Pates
demand private
to price discriminate
rates than r e _ profits
Demand
effect
of CB regula-
of the interest A supply
of funds
cost as $S, and demand
is set at rd made
equal
are allowed
Banks
is L 1
the CB L2 - L 1
If on top of this
and charge selected are increased.
lower
is L 3 and supply
To borrow from
of (rl - _d ) L2'
for
to discount
Both rd and rÂŁ are fixed for loans
and
(large)
they
borrowers
can continue
earning
28
Interest Rate
D
_S
\\. e
r
rd
i
_-_D
I
I !
I
LI
L2
Chart
L_ ......
2
"
29
abnormal
profits
Unreasonably through
as long as CB allowsthem
low rate.
licensing
by imposing initial
Moreno's
empirical
on bank behavior
is given
third)
their total sources
composed
Bank.
been
support
entry
bank merger
and larger
for 1962-65
of funds.
for the implications
in some studies. showed
an extraordinarily
small part of their
decreased
On the other hand,
total
discloses
These
in relation Gallardo
window.
to the total
(1972)
The slow growth
due to the low effective
funds.
that funds
large banks
part
readily i.e.,
flowing flow
deposit
and
deposits,
rate offered
at form
also from and time
into short-term
sources
banks
discount
to savings
funds
of
of (about one-
The next table,
loanable
in deposit
Hooley
that commercial
and Tan (1976) found
more than 50 per cent of their
discount
banks
Funds from pure intermediation_
the World Bank Report_
obtain
by restricting encourages
for existing
spotty
in profits
relatively
policy
large sums at the
for new banks.
plowed
deposits
ratio
flow of funds analysis
the Central
is protected
A related
equity/debt
Some rather the policies
power
of new hanks.
larger
capital
Monopoly
to borrow
assets.
that rural banks
from Central
Bank
is likely to have
and to the low dis-
count rates.
We may conclude strategies g_anted
adopted
priority
that
including
industries
to have mixed results.
the combination
those
an interest
and specialized
The financial
system
of development rate and credit
financial definitely
finance incentive
institutions expanded
tend in
3O
number
as well as in size.
Its geographic
shown by the more dispersed
World Bank studies
was partly
argued
evidenced
due to the policies
rather
mediaries
investments
of larger
do not guarantee,
tive projects.
credit
Strong
allocation
and other
control.
amguments.
bank-supported
utilization
hotels,
etc.
have become
Those
by bein_
efficient
arguments
are brought
any empirical
There were newspaper
projects.
There
rate of subsidized
Velasco
(1969) found
of invest-
from the
cost.
The policies
among
all prospec-
out in the literature
work
reports
industries
inter-
to finance
in a regime with
is evidence
(_966).
able to borrow
of funds
be
a supply-
through
of levels
interest
and the
it might
available
as
growth
by Patrick
able to borrow
allocation
tends to be inefficient
Hardly
Gallardo
Financial
choices
scale and at a lower
however,
well.
increased
here was essentially
on self-financed
benefited
Mapa,
as classified
have been reduced.
have definitely
has also
For this reason
development
that funds
the constraints
ments and techniques
market
adopted.
than demand-following
To the extent
of banks.
this development
that the institutional
leading
these
location
reach
that
interest
rate
has been done to support
on bankruptcy
of over-investment
of government or low
such as sugar milling,
that DBP gives
a heavy
weight
cement,
to value
31
collateral D B P
in its allocation
was
also
foUnd (vibal,
large scaleprojects. empirical
These
work on credit
The negative policy
low deposit
allocation
effects
encouraged
Credit mediation.
(Please
These are reviewed
of the market
are studied
explained
3.
this pattern
are found
to
The analysis i) shows how House-
self-financed in production
advantage.
on other
aspects
in the next two sections.
sector_
rate
market
of inter-
Two segments
and the money
the latter_
a rapidly
of development
is partly
market. g_owing
by policies.
Securities
Market
Equity Theme
from specializing
- the securities
It will be seen that
on
but more_
to them.
in low-productivity
implications
The first is found %o be a lagging one.
to savers.
from lending
a comparative
policieshave
rates
m efer to Figure
savers
to engage
they have
deposit
unattractive
They are also discouraged in which
its lending
is needed.
The allowable
rate in banks detracts
enterprises.
to c6ncentrate
on inter_aediation of the interest
of this section
are thereby
activities
1_9)
low and therefore
at the beginning
not as much. on productivity.
give suppo_t_'to_ithe arguments
have been recognized.
be unreasonably
holds
criteriaand
is hardly
shares
and bonds
any pmivate
bond
are _ot popular
issue
borrowing
and the volume
instruments,
of equity
shares
32
&_ew very slowly
compared
that firms preferred from public banks.
To borrow
or publicly
are family
Others pointed corporations.
and have
the business
floating
securities
hesitate
to become
banks
These
retur_
is much
19 per cent for long ter_
Large corporations
preferred
rates from
maximized
by financing
Equities,
however,
rate
corporation_
to exercise
Some would
All these
lower
probably
Lending
full control
argue that explain why firms
Family
through
are issued when
equity
mineral
are largely
to deficit
from
35 per cent
return rate
of 14 To
even lower before
activities
profits loans
borrow
Therefore
instead
r_quiremenT
like those
can be
is Too large banks
are mostly
engaged
and marketing
criticism
can
This may
public.
securities
at
of equiTies_
to any one boz_ower.
corporations
financing
about
to a CB regulation,
large
on governemnt
bank
the capital
According
very widely
rates were
in priority
banks.
activities
or oil exploitation
to range
than corporate
engaged
The public
by banks.
is found
be the reason why only very
related
Philippine
Many are earning
lend up To l0 per cent of the bank
policies
prefer
as Theirs.
loans.
The 70s.
Papers
Than from primary
public.
rate
to be accommodated
espec_ally
such as the DBP, PNB and rural
families
is cumbersome.
(1970) argued
institutions,
to the fact that most
7 per cent to 50 per cent. Lending
Valenzona
from Them was lower
_dentified
Co_poratlon
rates.
loans.
from financial
supported
The cost of borrowing
securities.
about
to direct
on
of securities.
in
Until 1966, only long-term projects
were
instruments intervals,
issued,
Their
face values. usually
securities prices
These
weekly
depending
issued
at fixed prices
issued
in the 50s and 60s were
an important financial
and rates.
secumities. Bank.
The latter
auction
and repumchase
and large individual
marketing
ignored.
having
time rates
are stil_ low rates
marke_
Moreover
the
for government
between
government
financial
competit_
they do not fc
transacted.
bilateral
betwee_
fairly
attractiveness,
a secondary
remained
that among
bidders
and th
securities
institutions,
_overnment
Mission
securities deficits
transacted
Bernsteln
(1955) Missions
pursued
recommended
to provide and increasing
in the securities
p. 55) mentioned
the advices
of the first
that on the development
The fimst
of issues
(1961,
The effective
at
at
or the
holders.
of government
of financing
their
of securities
time.
to the Philippines,
market was
at chosen
Long-ter_nbonds
securities
issues and markets
It is noteworthy Missions
were fixed
discarded.
to develop
The transaction
Central
sold in auction
public works
Those with unreasonably
Despite
part of the stock failed
rates
bid prices.
short and long-term
system
and interest
wer_
on the auction
rates are now available.
specific
in the last few years.
varied
Both
financing
market.
of The securities for an effective
non-inflationary the volume The Bell
this recommendation.
That Governor
Cuaderno
three
intended
sour(
and variet_
(1950) and Mapa's
study
to sell to the
34
public
the first bond issue.
mechanics
to
posed when
use
.
Cuaderno
Instead,
the Central
he discussed
Bank purchase
No discussion
stated.
The Bernstein
and other attractive attractlve
features
government
bills
Toward assets was felt. evolve,
especially
Foundation,
Andres
to a Sho?t-Ter_
dent of Bancom_ Government Babst,
Herman
Executive
a need
private
Treasur_y Bill
Division
at levc high ra
and liquidity. develop
Floats
the securitier_
market
association
was beginning
Market
to
Development
of business
1966 a seminar
c
for short-ter_
The Economic
entitled
leaders "An Intrc
in the Philippines". Bank_
Vice President of the Bankers
Vice President
the rate offering
for a market
of the Central
Frenzel,
Bank use/
and lead to the development
call loans.
in February,
then Governor
Securities
recommended
to help
its volume
on interbank
organized
Castillo,
Mission
the Central
and fixing
about this time the money
(EDP) a non-profit
and economists duction
At
issues
was assumed
the mid 1960s,
danger
new issues.
such as tax offset
market as a whole by expanding a secondary market.
what marketing
the inflationary
was made on the criteria
for choosing the rates on particular originally
did not discuss
Sixto Roxas,
for Sales
and Trading
Trust, N.Y,,
of the Pacific
Banking
P_esiin
and Chester
Corporation
g_'-
the lectures.
The lectures and the functions desired
mevolve
of a short-ter_
features to
enable
around
two themes
securities
it to meet
these
--
market needs.
a) The need for and
b) the market':
35
Castillo to develop
began with
the securities
a brief
market.
discussion
He went
of the Bank's
failure
onsaying:
"For the past 17 years, since the Central Bank was organized in1949, we have tried to develop an active government securities market in this country. We have a department in the Central Bank, the Securities Market Department, which was organized precisely to perform this job. We have tried our best to educate the public in dealing -a in the buying and selling of government bonds; but in spite of our efforts, we have not quite succeeded in reaching a desirable stage where government securities could be bought and sold as a means of monetary control. If there were securities in the past that the government saw fit to issue, we tried to market the securities as best we could and to get them accepted by the economic community at large. We have employees in the Securities Market Department who go around the country telling the people what government bonds are and _ncourag_ng them to save part of their incomes by buying 4% R _ D Bonds which still form the backbone of the securities market in this country. Despite such efforts we have not been able to drum up enough enthusiasm to influence the community to invest an increasing portion of their income in government securities. Today, with interest rates soaring to unheard of levels, a 4% bond may appear unattractive as a form of saving even in rural communities and inspite of the safety feature and other guarantees it carries. And it is for this reason perhaps why only the banks and theCentral Bank are the main holders of this type of government security today. Banks have purchased them mostly, if not exclusively, for reserve purposes but not as an investment which could be counted upon %o yield a return attractive to the stock' holders. While we have issued almost all types of government securities which you would find in a highly developed country such as treasury bills, certificates of indebtedness, treasury notes and !ong-tez_n bonds, they are merely forerunners of what we should really trade in more actively in the years to come. Treasury bills have been issued -- for that matter, all types of government securities have been issued at fixed prices, at fixed rates of interest, and except for one issue these have been bought by buyers showing different degrees of willingness. In most cases, we have had to use persuasion, or disguised threats, to make them invest in these govez_ment securities.
36
But to a Central Bank, it is really the treasury bill that should foz_ the core of open market operations. This type of security should be well-known in the financial community and should be freely traded in as a means not only of investment, but as a means of influencing money supply and the credit operations of the financial institutions in this country."
It might be instructive term market
as enumerated
to list the f_nctions
by Frenzel
of the short-
in the seminar.
a)
"Number one, we want to harness cash flow. Corporations hot money: 3-day money, 17-day money, 22-day money which put effectively to use in a short-term money market."
b)
_'Second_ weVd like to employ some of the excess reserves of the banks. Now_ admittedly, an occasion, there is no such thing as excess reserves. However, on a Friday_ there's invariably some money that could be invested ove_ the weekend. Some only for short spans -- 15-day, 18-day, 22-day periods, but the funds are availabl_ for employment at a rate."
c)
"Third, we want to create market liquidity. We want to create an instrument which is money good on the spot, which has a free market_ is quoted regularly, that each investor has ready access to."
d)
_'We want to establish a key rate. In the U.So, the key rate is the 90-day bill Pate. Other rates are geared to this. Of course, from a Central Bank view, the key rate is the discount rate, and private loans and other market loans are geared from that level."
e)
"Another objective of the money market is to enable to perform its open market operations effectively. great care to read the Central Bank Act."
f)
"What is a money market dependent upon? This would be the next logical step, and first and foremost is the fact that there should be a flow of short-term funds seeking temporary investments. These short-term funds can come from any source you want. Again, the insurance company, the corporation, the bank. I repeat the same names. They do have funds on occasion. This would give you your flow of funds ."
One may conclude understood
what
is needed
from his statement
to develop
a market
generate can be
the Central Ban]_ I have taken
that Governor for securities.
Castillo There mu_
37
be a secondary unincumbered
by
market
interest
stood that securities sell when
similar
to the stock
rate and other
with
a fixed yield
exchange
restrictions.
a secondary
The succeeding need and the desired
market
governor,
features
must be
In fact he under-
of 4 per cent could
rates on other assets were higher.
for establishing
and trading
not possibly
Yet his recommendations
was not implemented.
Alfonso
Calalang
of a securities
market.
also recognized He argued as
follows: Now_ what are the prerequisites of effective market operations especially in a developing country like ours? First, to my mind_ would be the availability of an adequate supply and variety of securities that should be freely traded. Seeondly_ there must be a flexible interest rate system which should respond not only to The type of security offered but also to the availability of funds for investment. And then the securities that are Traded must not be fixed in price as they are Today. Except for one issue -- the 7% government bond -- all the prices were fixed in at par in the past. And even the first attempt to sell a security that should have been sold without any fixed price did not quite succeed in attaining that objective. A Third requisite may be the development and g_owth of specialized institutions which would assume the risks of the market. f
There are different procedures in open market Operations. In some centers, central banks deal with private intermediaries such as dealers_ discount houses or brokers. This is the case in Canada and England and the United States. Private intermediaries who deal in these securities obtain their funds through short-ter_n loans from banks. In addition the market may also include private companies with excess funds who may wish to use them to purchase liquid but interestyielding securities. Sometimes the Central Bank grants advances To be used in these transactions. In other cases, a sale of government securities carmies a repurchase agreement by the Central Bank. Many central banks deal directly with commercial banks who become the principal agents of underw_ _nd secumities dealers. In other countries, central
the
38
banks deal with the specialized public institutions. This holds true in Belgium where a public intermediary has been established by the Central Bank to deal in government securiTies. Certain features of this method might be considered in establishing an active market for government securities in the Philippines. Of coumse, I suppose the procedure _at will be adopted will aim to develop a market by "feel" and will be directed towards determining the most f_uitful and most effective means of drumming up enough interest in treasury bills and other government securities here.
He also explained
in the follwoing
statements
why the market
did not develop. "The market has not been developed because, usually_ the government is unable or unwilling (or both) to borrow at current rates of interest. As of the end of 1965, 69 per cent of outstanding issues carried interest rates of 4% and below. It is our objective to decrease this percentage and see that these securities are sold at current mamkeT prices째 Moreover, government securities a_e not regularly issued at_ say every 90 days or every year or some other fixed period. They are issued only when the government needs additional resources to meet its obligations rather than in responds to the liquidity requirements of the economy. I believe it is about time that we adopt a more sophisticated system and develop a wider and deeper securities market here so that government issues can serve not only as a means of satisfying the financial requirements of the government but also as an instrument of monetary management.
Governor
Castillo
cost or debt servicing its potential lity.
stated
the government
of The issues when
contribution
to financial
It is to be noted the Monetary
bond
issue.
The Governor
ment
from those of the CBo
The literature
cannot
deciding
development
Board
therefore
has not helped
considered
on the rates
shed light
and not
or to banking
of CB directly divorce
the interest
motives
decides
stabion
of the govemn-
on the marketing
39
problems
of government
dual holdings
of government
institutions attractive interest safely
securities.
form of primary rate (comPared
argued
is almost
since most Financial
reserves
since
to zero rate
that the_e
leads to the potential
exist private
zero private
find them an
they earn relatively
demand
indivi-
are held by financial
institutions
on reserve
deposits).
as an important
high
It might
fo_ government
the issues are not available
of securities
be
securities
to them.
This
form of savings.
Money Market
Activities the the early 70s. company
claims
increased
of interest
at times.
Because
it attracted Monetary
in the money Transactions
The rate
gone
securities
and large eo_porations.
which are not met because
4.
There
market
of the relatively
became
assets
uses
flowed
activities.
- interbank-call
But there is no a priori
instead
banks
loans, bank reason
up to about
40 per cent
offered
in this market,
intermediaries.
into short-term of investment
flowed
acceptances
The
that otherwise
are considered
It is true funds
and large (1972-73).
rates
that funds
participation
(Investment
financing.)
high
in
it quadrupled
reaching
and other
concerned
cited was the heavy
longer-term
widely
much attention
interbank
In one year
funds from commercial
Authority
attracted
in short-term
rapidly.
fluctuated
into longer-term
Evidence
market
would
assets. banks
in money
to specialize
into these and large
to say that this movement
have
in
new fo_ms
company resulted
of
papers. in the
40
shortening noted
of the maturity
that interbank
structure
boz_owing
they are made to fill reserve funds outside
dominated
The state of knowledge
little
written
ef its transactions
intermediary
portfolio,
that this market
borrowing
ter_s.
of financial riskiness
developed
to meet
are relatively
that the rapid _owTh
the varied
of assets.
mates of
inflation
tions.
Until
Money market
It is
lendin_
and
market
It is also possible
the nominal
been a legitimat_
weme
to the increasingly
ceiling
rates
has un-
_ay Of evading_he
was not covered
conducted
and
new forms
The 70s, it is to be recalled,
1976 This market
_a_sac_ions
behave.
money
70s was in response
rendeming
have
and on
for liquidity
new forms
much higher
process
it offers
preferences
is
what are the
and lenders
expands,
this market
and there
of the market,
In the Philippines
in the early
might
sparse
of
not ne_atlve.
about
lenders.
rate ceiling.
rate regulations.
is very
mamket
inte_st
This market
on the supply
as a Way of diversifying
restmictive
tenable.
The effect
and how its borrowers
of borrowersand
instruments
So long as
in the saving-investment
As the financial
claims
the Transactions.
in the Philippines
The _volution
implications
likely
It is to be
tend to be positive_
The literature
explaining
assets.
deficiencies,
the money market will
seems to be quite poor.
of financial
interest
by the regula-
in a special
segment
of
¢
the market. lenders
There thus _esultsprice
which recelvethelow
investors
which
discrimination
regulated
ar_ given The money
deposit
market
rate.
?ares
between
ordinary
and the large
There
is some
evidence
41
that private to differ rates
banks discriminate
as to their
cannot readily
further
(hidden)
and a portfolio
of a sample
of the money market
reserve
position
in excess reserves, economize
d_esis
She provided of
discrimination
funds.
tracing
Similar
lent to those with tends to involve
are matched,
tightened
Surplus
in
without
its growth
S_aller
and loans or the securities
Bancom cial papers
pioneered
and bankers
rate
Interbank
used in the market.
When the
f_om
they resorted banks
the excess transactions of certain
tried
to
of some banks
to
took place
with individual
individuals
and companies
requirements.
are made
to trading
as a whole
reserves
sum as individual
transactions
data on interest
1961.
States
short-tern
pioneering
She also gave a brief
in 1960s
funds
large
primary
dealers,
by lending
deficiency.
and company
action
variation
(1975) is an important
In the United
on reserves
those with
were
The observed
as price
call loans were the first instruments banks'
Banks are found
study.
on the money market.
history
lenders.
loan rates.
be interpreted
Irma Clemente's work
also among
This lenders
through
type of transand borrowers
the usual
deposit
market.
in offering
acceptances
new instruments.
grew _apidly.
Its commer-
Some dealers
experienced
42
a doubling
of trade in a yea_,
to 40 per cent per year, later bankers'
Tion in 1974. short-ter_
Co_nercial
played
Using Central movement
their distribution
Bank data,
from 1971-74. houses
described
the portfolio
pattern
Finally,
she hypothesized
functions bills
reserves
of interest The author
rate.
were
did not explain
the year
tuated between
found
index
however,
10.3
and
consisting banks
she
interest
call loans_ price
index, foreign
explanatory
differed
rate
treasury
as arguments.
The variables
substan_ially.
should be this variation.
and their wide monthly
In 1971 the rate of interbank
(January)
in 1973;
instruments
monthly
consumer
were used
the range of 6.50 in January
(December)
good description
of the dealers.
to be significant
rate structure
a
(17) commercial
turnover
supply,
why there
is noteworthy.
1972 the range was 8.25 and 12.0
Money
transac-
and government
of 30 dealers
-- interbank
Thei_ coefficients,
The interest over
and seventeen
and stock price
first three variables
provided
and fitted by regression
papers.
papers
in this market.
From a survey
and trade
30
but
dealer
cent of total
rates on various
for each type of instrument
and commercial
exchange
role
of about
trading
and other
81per
Clemente
of interest
(3) investment
rates
issued by corporations
a small
of Three
agreements
composed
papers
growth
call loans dominated
repurchase
institutions
securities
of the monthly
Interbank
acceptances,
issued by financial
but most showed
loans
to 18.0 in November.
and 20.0 (August) (February)
fluctuation flucIn
then 3.25 (September)
and 18.0 (May)
in 1974.
The
4
fluctuaxion
was substantial
wide rate differential call loans, treasury percentage
points
among bills
the intere$ _ rate
occasions the rate penalty
the _nstruments
and commercial
differential
as high as five percentage
transactions
even on a day to day basis,
was frequently
points
fluctuated
it rose
to more
to have reached
this level.
A bank deficient
by the lender bank. he pointed further
others
Roxas
Some banks
Clemente The bulk bankers
(1975) gives
of money market
Secondary
than government
secu_itles
small.
Part of the _overnment
primary
reserves.
Consequently meet
As such
banks tended
their reserve
it
day to day
(1977, p. 42) mentioned
by the Central
tO pay through
the noose
of this problem.
First,
secondary
of portfolio
reserves.
He
composition
of
secondary
reserves,
reserves_
empirical
support
securities
held already
to rely on the Central needs.
and bills
papers were relatively
be counted
credit
call loans
in the form of treasury
and commercial
cannot
to this argument.
was on in te_bank
reserves
and unexpected
that
On several
imposed
hold minimal
transactions
acceptances.
to
could be jacked up to the
deficiency
the causes
up to 50 per. cent of required
other
The rate
the lack of any pattern
held by banks.
averages.
can be made
explained
It was alleged
Roxas
that banks do not hold sufficient
observed
reserves
in reserves
_lis rose
on individual
in the monthly
rate of 42 per cent on reserve
Bank.
A two to three
_n some months.
than 40 pet, cent.
-- inte_%ank
experienced.
even more widely
than was reflected
qhere was a
transacted
papers.
3
forms
thei_
as secondary Bank and other
reserves. banks
to
R o x a s
blames
balanc_
deter_ninant of banks _ liquidity liquidity resulted
squeeze
from deficits
considered country reason
in 1970,
and reserve
1971,
and 1974.
in the balance
a surplus
-- foreign
given was the lumpiness
government,
foreign
can easily
Roxas recommends
companies
of payments.
and importers. deficiency
He also suggested
to allow
banks
reserves
for a minimum
Roxas
indirectly
tioned
recommended
that banks
Tion brought
when
about by the legal
ceilings
on these
Pate
and excess resemves
rate
on the other.
_elationship. system
But he stated is zero_
reserve
position
the method
that '_when excess
the interbank
call rates
and for every
is in defieit_
loan is _educedo
rates when he men-
they are in a tight
situa-
rates.
and interbank
He did no% discuss
reserve
to fill their
the _elat_onship
on one hand,
and 12.6 peru cent per annum, systems
estimated
them
of deposJt
bank.
secondary
on interbank
deposits
Roxas
by a few
secondary
to mediscount
cannot expand
Apparently_
entire
bank
30 days to enable
the freeing
-- the
for the depository
levels.
Thus dependence
The
Another
Large withdrawals
of commercial
deficiency.
was
by some depositors
build-up
reserve
to him
1_e market
transactions.
a gradual
primary
He cited the
of 1972 and 1973 when
of withdrawals
of about
as the main
These according
exchange
lead to a reserve
flows
position.
'_nommal_; during the last quarter
earned
clients
of payments
between
interbank
and commercial
used
to obtain
reserve
position
settled
FIO0 million
the interbank
paper The of the
at between
11.6
tha_ the banking
call _ates
rise
45
between
1.4 and 2.2 per cent per annum"
that interbank closely
rates were
correlated
with
the leading
commercial
These two papers â&#x20AC;˘move very Bills.
Bills may explain
why Their rate
in these bills mostly
Speculation One big commercial over-extended bank_
1976, p. 46).
in the money
rates.
but they fluctuated
is more
take place
resulted
bank_ the Continental
suit a few years
stable.
when originally
allegedly
f_om Bank,
activities.
after
Genbancor,
money market
choice money.
among competing A very
very useful
Thei_ empirical very brief.
of the Report
analysis
following
the Theory
from 1974.-76 (the years
Bank became
available)
among the instruments
study of the
of total
framework
is the portfolio of demand
fo_
to theory which
as to students
the theoretical
they
a theoretical
was devoted
as well
an investment
allegations,
The theory used
following
Bank officials
The movement
from the Central distribution
instruments,
large part
to Central
instruments°
provided
it was
Bank debacle.
an IMF-CBP
for studying
rate movement.
failed because
Bank.
first
transactions
the interest
alarmed
The Report
than
issued.
these
in 1976.
on
of T_easury
Besides,
work was done to support
money market
and were
the rates
market
the Continental
It then requested
He found
more widely
Though no empirical The Central
market
Notably_
The very narx,ow secondary
in the money mamket
followed
_ates
paper
closely
those â&#x20AC;˘on Treasury
(Roxas,
discussion
of money. is, however9
when official transactions,
is
statistics their
46
transacted variation ment
and their respective
was
found not to differ
tended
and the U.S. was compared.
siznificantly.
the individual reached
rates
the IMF-CBP
researchers
made an important be appropriately
noted that improve
inter-hank
the liquidity
institutions). papers,
This conclusion
used were monthly
non-hank
focused
included
on deposit as to which
and deposits
with
to
Transactions
in intermediatlon
The
It is to be mainly
to
(and other
financial
and, commercial
and banker's
intermediary
money
assets/liabilities
of banks
othe_ hand, are respectively
the whole
substitutes.
substitutes.
on one hand_
agreements
in these result
averages
according
are transacted
position
substitutes
repumchase
concerned
as deposit
and reserve
Deposit
needs
fluctuations.
on cases which
were
clarification
loans
This move-
_2 per cent_
While Roxas and Clemente
should
The degree of
to even out the wide _,eekly oF even daily
Roxas and other bankers
study
traced.
by the fact that the rates
They do not reflect
market
we?e
in rates in the Philippines
to be qualified which
rates
acceptances,
liabilities between
on the
and assets. savers
and
investors.
The study gave a characteristics of holding financial
of deposit
whether
private,
corporation;
fairly
detailed
substitutes public,
(b) their
analysis
including
institutional,
distribution
of the
(a) the distribution individual
by issuing
or non-
institution,
47
and
(c) their maturity
issue
structure.
the bulk of deposit
Commercial
substitutes.
banks
Its share
are observed
to
increased
gradually
from about
50 per cent in 1973 to 62 per cent by the middle
of 1976.
Investment
banks issued
share declined
from
banks
The main holders
placement
corporations.
camefrom
r_sing
these
a negligible
of these
assets
-
in commercial
In the latter
70 per cent were
in _2.0 million
had maturities
or more.
More than
had overtaken
ordinamy
Table 2 for the annual assets.) only.
deposits changes
It is to be noted
They showed
erratic
Transactions
showed
were in very with
2/3 of
80 per cent of the papers
to regular absolute
(_2.0 billion)
tha_ they started
call loans.
deposit
deposits, growth
by 1972.
in the composition
movement
and
70 per
holding
and above
to show that
(1976) their
individuals !
and almost
private
16 per cent bein_
alternative
from The }{orld Bank Report
banks
in _I.0 million
of 90 days or less,
an attractive
de-
over 80 per cent of
institutions
The data may be interpreted have become
but their
amount of these
are private
In 1976 a little
trend from 52 per cent in 1974.
large units
portion
T. 12, p. 50).
this source
cent in quasi banks. a
issued
(IMF-CBP , 1976 Report,
non-flnancial
largest
31 per cent to 21 per cent over the same period.
It is noted that thrift posits
the second
AS seen
(_2.9 billion (Please
of gross
to be offered
at the beginning
substitutes
see
financial in 1965
bu_ on the
_r
•
.
"lnl_O
o.
o
_
tl
I
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['--
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(_ rm i.
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n_
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4=
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49
whole
they grew fairly
We
hinted
in the money market discriminate uniform
rapidly
at the beginning
was partly
between
to
Chart
for â&#x20AC;˘funds to all banking rate,
_i
rate.
Let us assume
below
r . e
curve from point may however
M
that the bank experiencing of funds
O.
They borrow
pay any rate below
r .
to price
of payins
borrowing
from the CB part
to large
rd
depositors. of and demand
can borrow
at
Profits
deposit
SIS 2 at the
demand may offer
are forthcoming $2S3,
interest
is the ceiling
excess
a
by payin_
is the equilibrium
and
supply
tO
profits
re
on loan rate_
Banks
Additional
institutions
SS and DD to be the supply
fumther
r%.
that intermedlation
Instead
substitutes
institutions,
is the ceiling
same rate as
lenders.
depositors,
deposit
3 we assume
of this section
maximize
small
of its funds, and offering Going
banks
rates to ordinary
1965-1975.
a move by financial
small and large
rate on all deposits
regulated
over the decade
along
and lend at
will be higher
a _ate
the SS re.
Banks
When they
e
borrow
on the lower position
of
M0
curveg that
is at
rd _
where
!
the additional
supply
Banks can therefore regulated
$1S1
increase
and free parts.
discriminating
is just equal
more finely
profits
Profits among
to additional
by segmenting
can be further
borrowers
loans
the market increased
and lenders.
by
S2S 3. into the
5O
Interest
r_re, D,
'
re
........................
_d
......
,
.
_/
I
x,_.
S
D
I ,t:
t
S 1 Si S2 Sa
Chart
Following
this analysis
Funds in Pesos
8
it would
seem that
behaviou_
to study is That of the intermediaries
holders.
Obviously
instead
of savings
differential
the latter
will prefer
or time deposits
between
are not too diffement
them. since
when
The liquidity both
the more
rather
than the wealth
to hold deposit
there
substitutes
is a wide yield
and risk
are liabilities
interesting
:of these
of the same
Two issues
51
institution(s)
and have similar
specified
maturities.
With regard
to
t
intermediar.y behaviour extent
the following
do they exercise
What is the de_ree allocative
study
substitutes.
decisions?
free market?
What are their
a theory of portfolio
They hypothesized
choice to
and tested
the
I.
Demand for deposit substitutes is a function of GNP, rediscount rates and a dummy variable fop time,
2.
Rate on deposit substitutes real money supply.
These
There is a need for more
by savers
and by financial
hardly
any literatume
except
for the empirical
such as the studies Repor_
(1976).
investigated
of the Philippines.
criteria
of GNP and
is one by
are not adequately
analysis
of portfolio
Unfortunately of financial
there
is
institutions
and uses of funds
(1976) and the World
earlier
This is a good
function
of the sources
and Moreno
Menzioned
the lendinE
rigorous
behaviour
descmiption
function
functions
institution.
on portfolio
of Hooley
is a
this demand
or by intermediaries.
choice
which
rate
To what
functions:
wealthholders
Country
in interest
in the
applied
It is not clear whether
explained.
may be raised:
impacts?
for deposit
following
power
of discrimination
The IMF-CBP demand
monopoly
questions
is Velasco's
study
Bank
(1969)
used by the Development
start but it is limited
to a
Bank
52
descriptive
analysis
about other banking their cPedit_ their main
what
of the lending types.
caused
depositors.
rule used.
How, for instance the bankruptcy
We know so little do rumal
of a number
banks Bllocate
of them; who are
Why do not they seem tobehave
like commercial
banks?
There are other important not been
studied:
Security
System,
market
The Government and private
!_as not been
finance
studied
choice is needed.
of equities determine
financial
Service
insurance
companies.
fimm?
As we enumerated
choice
and finance
System,
the Social
The equity
In this
regard
a model
Internal
sources,
dimect
bor_owinE,
means
the use of one om a combination
does market
Insurance
that have
either.
or bonds are alternative
extent
institutions
segmentation above,
decisions
determine many
of financing. of these
fundamental
of
To what
choice
questions
have yet to be analyzed.
issue
What
soul_ces?
the financing
and bond
of a
in portfolio
53 5.
Interest
Rate
The literature highly
theoretical
income
and growth models,
of portfolio
pieces
choice
seminal
various
on
saving/consumption,
expansion
of Fisher's
permanent
income
investment
hypothesis utility
over time.
to influence
savings
Ma?kowitz extended
a utility
to more
whose
(for instance
referring
back
Markowitz
analysis
distributions
worked
along
are an
and others _ are decided
to include are
portfolio
expected
the same line as Tobin
is r_gorously
are tSe means
of alternative
article
(1969)). in 1967
applicable
Gaussian
The main criticism
may not in fact maximizeutility
main components
Feldstein
to an earlier
are normally
and
on inter-temporal
on assets
than just two assets.
of the rates of return
in generality
expectation
The latter
It is logical
is that individuals
function
Tobin's
and investment
the yield
under
itself.
(1959) having
his analysis
of this approach
variance
level
since
followed
and Friedman
saving
theory Tobin
of choice
contributions
and portfolio. theory
Modern
rate
into
in short-run
preference.
theory
of interest
in which
in the saving behavior
analysis.
literature
models
dichotomized
and interest
liquidity
and the mope recent
decisions
_om
from Keynes
this into a rigorous
work covering
so as to maximize
choice
and, institutional
A very rich theoretical
yield determination_
choice
rate is somewhat
on portfolio
sprung
(1958, 1965) developed uncertainty.
on interest
or where
and
portfolios,
hence
Samuelson
(1970)
stated that only where
lacking
the Tobin-
the statistical
the utility-function
to be
54
maximized
is quadratic.
he concluded
that the mean-variance
The controversy (for instance
however
and uncertainty.
attempt
yield
the risk
analysis
is quite
limited,
is a very good approximation. of continuing
research
(1977)).
of assets
In addition of the asset
to integrate
where
goes on and is a subject
see Fishburn
The structure
expected
Nevertheless,
arises
there
is the effect
mone_,
monetary
from the existence of price
This effect has and value
theory
of risk
changes
its origin
on the
in the
by Pakinkin
(1956),
[
Metzler
(1959) and others.
of Hicks supply
(1939) formulated
and demand of money
rheim prices. indifference possible
Implicit
structure commenting potential theoretical
of interest
a general
rate
is implied
for each other,
basis for the issue
Shaw
streams
(1955, 1960) which revolves
arising
from
Robinson
that each type of asset and of
money.
portion
around
is a
or non-substitutabihowever
the question
of near-monies
(1951),
This is the
to the issue raised
monetar_y policy with the existence
goods and
A corresponding
cn substitutabil_ty
works here are addressed
the "joint"
consumption
in the model.
A sizable
the works
is the use of utility
and consumption.
lity Of money and near-monies. empirical
to include
income
along the same line noted substitute
(1938) followin_
that treated
formulation
possible
assets
Marchak model
and assets
in this
among various
combination_of
Earlier,
of the
by Gurley
and
of effectiveness
or substitutes.
A
of
55
convenient
survey
is recently
A related of interest-
issue on demand
the short
and Feige and Peamce viewed
made here by Feige
as a part of a general
on all alternative should be made
financial
to depend
assets
structure
of interest
with
the emerging rates.
(1957), Meiselman
demand
convenient
for financial
timepreference that most
period
capital
assets.
of th_ works
valuation
structure
of interest
of demand
for assets.
through
bodyof
Malkiel
the term structure
Zo utilize This
and investment
noting
holdings The
time.
This
llteratuPe works
(1966),
on
are
Nelson
(1974).
The need to consider it more
is
of interest.
the important
(1962),
(1969)
the corresponding
large
Among
of money
and that money
spectrum
and hence
Laidler
Pate
then the Pate of return
are relevant,
points
of interest
(1972) and Dodds and Ford
have made
decision,
rates must have to be extended
in consonance
those of Culbemtson
if the holding
upon the entire
of asset at specific
the ter_ structure
that
(1977).
is the relevant
rate of interest.
portfolio
structure
is actually
fop money is, _at
or long-term
(19.77) argue
and Pearce
a consumption-oriented
is the theory
opportunity
difficult,
render used
embedded
of Fisher.
on the portfolio
which
of interest
theory of
in the rate
Stiglitz
approach
the treatment
rates
focuses
(1970) on one-
of the ter_
this consumption-oriented
of
theory
56
It is wmitten
Tn this market that are fairly
alternatives choice
that these
for a very well developed
market. assets
to be noted
there close
makes meaningful
full-employment
flows
downward
-
financial
stock
of alternative
for each other.
the application
of earlier
model,
Access
to these
of such neat portfolio
investment
In growth
it is shown that money
folio demand
of capital.
for both physical
on physical
assets.
will therefore
equal
by
saving,
an_ a
interest
and financial
to the steady
assets.
their yield
would
be lower
have
This argument
and financial
Savems
with the
rate
factors.
is made
assets gmows too slowly,
Investment
Later models
and real
and productivity
financial
sloping
by both monetary
models
beginning
rate is determined
of an upward
function.
grow such that their yield
of saving
vintage
the interest
by the intersection
sloping
determined
that
perfect
and varied
substitutes
models were
constructs.
classical
must
and relatively
is a lange
In the mac_o models
real
portfolio-saving
would
demand more
than
that level
assets
growth
is based
rate
on port-
If the supply rise relative
of to
financial
assets.
required
by steady
state condition.
These models interest
rate.
are valuable
But they have limited
for our general applicability
understanding to economies
of
57
characterized analysis
like the theory
financial oriented capital strong
by serious
nmrket models
marker
sezmentation
system.
preference
ments.
Interest
compared
where
and other
development-
rate
yield
of investing
individuals
in higher
pmocess
result
of economic
experienced. fashion.
Some industrial
financial
market
enterpreneurs leads
When
over all yield temporary
is expected
_o be higher
sectors
or areas
grows in the same fashion.
investin undeveloped
and risks
tend to be
in intermediating
2, results
in greater
, wage workers
and
cost of funds
the more
segmentation
to
are indivisible,
and interes_
to develop
financial
from the optima
investments among
lack a
with
indivisible
to lower
activities
development,
The economy
in section
to savers.
the specialization
to segmented
of transaction
as argued
The specialization
and higher
is generated
of LDC
from very
by McKinnon
and not specialized
among
however,
and Shaw to a modern
are expected
Costs
are small
of activities
intermediatDrs.
as described
of rates
to borrowers
behavior
for cmedit may develop
of return
market.
These models,
of Gurley
a structure
Intermediation,
in uaderstanding
finance.
The market
and rate
lenders
specialization
borrowers
of the McKinnon
of self-financing
to developed
activity.
a_d Patrick's
lending-borrowing
of time
institutional
amd Shaw,
and development
In McKinnon,
Moreover,
of Gurley
seem to be more useful
stages
interpersonal
imperfections.
of finance
microformulation.
rudimentary
higher
market
enterprising rate.
In the
is likely
to be
in a non-unifor_n
lag behind Some parts
others
.
The
of the economy
58
may remain modern
using self-finance
financial
segmented
market
market,
and rudimentary
operates
interest
rate
in the industrial varies,
with
own rate structure.
Artificial
intervention
to what was described
reason
similar
for interest
" rudimentary
rates in certain the debate interest
each segment
segmentation
arising above
literature
on interest
Bank policy _on credit
No study has been
market
instruments
1977); Tan's
additional
rate may be considered
and the complex
done on the total
andtime
and the small surveys team
of the Philippines
of effective
(PDCP)
in 1972.
and analyze
past studies
the total
is badly
(Clemente,
needed.
Bills
lending
by rural
on
of interest
rate movements
Treasury
within
1975_
savings
rate undertaken
of studies
non-institutional
In this
rate
by the
Corporation
a number
interest
IMF
and Bancom
Development
In addition,
charged
regulations
structure
of a few alternative
deposits,
of
such as the interest
market
in 1971 and the Private
the lendin E rates
A study to describe
in the money
(1974) comparison
forms such as savings
integmating
will produce
offshoot
of the market_
were obtained
estimated
from government
Some are mainly
of the financial
NEC-inter-agency
its
segments
segments
Bills_
generating
with estimating
Data on interest
Mission
In such a
It is concerned
rates and how it is determined.
rates of various
a
as some of its markets.
on Central
rates.
areas.
while
rate variation.
The Philippine as
lending-borrowing,
creditors.
structure
section_
we will put
59
their empirical results as an attempt at integration.
A.
The Interest Rate Structure
Any study of interest rate structure in the Philippines must start with the Central Bank regulations.
The Central Bank seems to
pursue a low interest rate policy but no clear statement has been made to this effect.
What it has clearly pursued is the development of special-
ized institutions by granting them credit incentives.
Up to the mid 80s
interest rates on loans seemed to be below the Usury Law ceiling of 12 and 14 per cent _or secured and unseoured ioans_
The deposit rates,
rediscounting and government bond rates up to 1960 cannot be considered to be below the market rate.
The regulated rates became untenable from
the mid 60s to the present as demand for credit increased and inflation rate rendered the regulated real rates negative.
The Central Bank
responded to these events by a gradual upward adjustment in nominal rates as seen in Table 4. The
adjustments seem to be modest compromises to
disequilibrium in the market.
The Central Bank response also took the
form of increasing the coverage of its regulaeion.
The contrast is
best shown by comparing the extent of regulation during the Cuaderno era and presently. th_.... _
In the first era, monetary control was mainly quantitative
selective credit incentive was givcn to a few priority sectors.
These incentives might not have had a substantial impact as the market rate then prevailing was relatively low.
Between 1976 and 1978 a longer
o co
_o
"0
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•_
0,)
-I•_
=
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o _0 -_,
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63
list of interest
rare regulations
substitutes,
other money market
In addition,
there
was made covering instruments
is a differential
deposit,
and loans
discount
rates
deposit
according
to maturity.
by institution
and
activity.
Studies advantage
of the regulations
substitutes freely
show that financial
bills to replace becoming
rates.
Law ceiling.
Banks
oD supplemnt
unattractive.
Banking
began
Corporation
on loans were substantially
showed higher
deposit
to be offered
whose
allegedly
of the National
institutions
to take
for the issuance
bonds
institutions
innovated
From 1966_
instruments
also clamored
Development
1972) of some financial
them.
the long-term
The small surveys
1971) and the Private
charged
or to evade
and other money manket
determined
institutions
rates
at
of treasury were
evaded the Usury
Economic
Council
(NEC,
of the Philippines
that the effective than the legal
(PDCP,
rates
ceiling.
Tables
/
on interest
rates from various
obtain
a partial
of NEC
(1971), Barrios
and Vibal
structure
(1979).
studies
of interest
(1973),
In 1971-72
between
14 and 29 per cent.
allowed
by law to charge supported
banks
rate.
Clemente
banks,
Presently,
These
(1975), WB
when the Central
about 12-14 per cent for cemmercial
publicly
are reproduced
in orde_
their
commercial
to
are from the papers (1976),
IMF (1977)
Bank reported
19 per cent on long-term are allowed
below
effective
2 per cent service
of
rate was
and other loans.
rates
banks
Public
or
fees which
are
64
effectively Borrowing
raises
the Usury
Law ceiling
from the money market
f_om 14 to 16 per cent.
is limited
to a ceiling
35 per cent of which is collected
as tax since
yield to lenders
This _ield
on deposit
is 11 per cent.
rates in commercial
and thrift
1978.
of 17 per cent,
The net nominal
is compared
banks
with
of between
the ceilings
7.5 and 12
per cent.
The studies interest
rate in the regulated
structume
obtained
instruments oftentimes
--
or lending
price movement declined
movements
fluctuated
deposits,
rates
rose
On the other widely
above
4.
hand,
are
whether are changed
the rate
to
in the
the legal rates.
positions
of competing
in the money market
seems
to be the interbank
Clemente's
is very sensitive
instruments.
position
This
to general
of banks.
show that the market
by the reserve
bonds
in the 70s the real rate
rates
is determined
The
lending
They do not adjust
in relative
in turn
rates
it more vulnerable
and reserve
(1977) studies
instruments
The regulated
of
of the market.
and government
s1_stitute
small making
in money supply
to movements rate
inflation
figures.
was relatively
(1975) and Roxas'
among
parts
structure
The real rate on many
varied widely.
so when
market
and unregulated
and time
Rates
give us a partial
of time as seen in Table
to negative
unregulated seEment
savings
intervals
together
is quite peculiar.
negative.
borrowing at long
whenput
The leading
call loan rate.
of banks.
This
Unfortunately,
65
Clemente's argument Roxas
money market
in h_interest
rate function rate function.
did not give the basis
of interest and Cruz Quarterly
did not use reserve
of his conclusion
rates of competing
instruments
(1979) give the following data on weighted
She used money
results
average
-
pasition
supply
instead.
in the cross-elasticity the money
market.
o9 thei_ money
interest
as an
market
Dompor study.
rates were •taken f_om.the
Central
Bank Statistical Bulletin and Banoom Development Corporation • .... •:' •• 2 ! Reports. Their result may be compared to Clemente's equation given in ! Section
4.
Dompor
and Cruz have the following
regression
MMR = 22.462 - .195 CPI - .23 ER (3.074) (-2.89)
_esulT: R2=
.70
where
MMR
:
average
interest
MS
=
money
SPI
=
stock price
CPI
=
consumer
ER
=
excess
on money
market
supply index
price
reserves
(Manila)
index
(Manila)
instruments
66 Table5 List of Bonds Issued Thei_ Maturities and Interest 1965 - 1970
Bond Issue
Maturity
PW % ED Bonds NPC Bonds NAWASA Bonds ACCFA Notes ,, ,' " " ,, ', " "
NIA (National Irrigation Treasury Notes " " " "
If
4 I 4 - 5 3/2 4 5 "/2 2 2 3 3 3 2 5 6 1/2
5 4 4
5 5 1/2 6
I I/2
2 7 7 1/2 7 7 1/4
Bonds
2
I!
4
NIA Bonds
8
Land Bank Capital Tmeasury "
Rate
5 3
(non-supported)
R.P. Replacement
Interest
Adm. )
Certificate of Indebtedness PW _ ED Bonds NAWASA Bonds
I!
in Years 30 30 40 2 5 5 2 5
T_easury Notes " " R.P. External loan Bond
NPC Bonds NAWASA
Rate
Bonds
7 _
Notes "
5 5
Source: ,Annual Reports_ Central
Securities
Ma#ket
Depar%ment,
Bank of the Philippines. '_
l0 3/4 11 /4
â&#x20AC;˘
67 Table
6
End of the Month Average Yield on Treasury ahd Bancom Bills, 1966-1970
End of the Month Rate 1966
1967
1968
T R ÂŁ A S U R Y 49
91
182
Bills
B I L L S 273
Bancom Rate
1 2 3 4 5 6 7 8 9 10
6.9 6.8 6.7 6.7 6.5 6.4
11 12 i 2 3 4
6.5 6.5 6.2 6.0 5.6 5.6
_ .7 .7 ,5 .3 .9 .9
5 6 7 8 9 I0 11 12 1 2 3 4
6 *4 6.9 6.8 6.5 6.1 6.2 6.5 6.4 6.8 6,9 6.6 6.9
.7 .8 7.2 7.7 7.2 7.3 7.8 7.8 7.2 7.5 7.3 7.3
i0,9 12,6 12.4 11.3 11.0 11.4 11.7 11.7 11.1
5 6 7
6.1 6.4 6.1
7.5 8.9 8.3
13.7 13.6 13_9
8
6.9
9 10
6.2
8._
8.2
13,9
6.6
7.5
14, _ 13,9
6.7
7,3
13:i8
11 12
13i
60 Table 6 k959
1970
page
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12
Source_
9.9 12.0 13.0 14.1 14.9 13.6 10.2 10.5 12.5 12.9
Tan, E. A. "\
8.9 7.0
7.6 7.6
13.2 13.9
7.6 7.4 7.6 7.7 7.1 7.6 8.8 8.3 8.2 8.1 6.6 7.6 11.8 13.1 13.3 14.2 15.6 13.2 11.2 11.2 13.2 !4.@
7.1 7.7 7.6 11.3 11.4 11.5 11.3 11.0 11.2 6.9 8.4 9.1 12.6 13.6 13.9 14.9 16.4 14.4 11.8 12.8 13.7 14.7
13.9 14.3 13.9 14.8 14.9 14.6 13.6 12.9 12.2 12.5 11.6 12.7 14.0 14.4 15.2 16.2 16.2
"Couduct
of Honetary
9.6 8.9 7.9 8.7 9.1 12.9 13.8 14.6 15.7 16.7 14.8 11.9 12.7 14.4 14.8
Po!ipy
2
15.9 15,8 15.8 15.7
and the Quant_taliVd
Cont_ol of C:_edit." Quezon C_y: university of the PhilippineS_ School of EconomicS-lnstitute of ECOnomic Deveiopm_nt and Research NO. 73-8, 1973.
(UPSE'IEDR)
DiscUssion
Paper
69 Table Comparative
Money
7
Market
Interbank Call-Loan Rates
Intemest
Rates
91-Day Treasury Bills (Primary
Market)
Prime Comercial Papers
1971 Januar7 Februamy March April May June July August September October November December
6.50 11.50 9.25 7.00 13.12 12.25 13.25 10.50 13.00 14.00 18.00 13.50
13.60 12.91 12.64 10.37 11.55 12.31 11.55 11.58 11.73 11.60 12.26 11.07
11.44 11.62 9.00 10.12 13.00 13.12 12.50 14.25 13.38 14.00 15.75 14.00
January February March April May June July August September October November December
8.25 8.25 9.75 13.50 19.00 14.50 15.75 20.00 10.50 13.50 14.50 9.25
11.62 11.12 11.06 10.97 11.70 12.36 12.73 12.66 12.61 12.59 12.04 i1.66
10.12 10.00 13.25 13.62 19.88 19.20 15.00 19.50 10.75 16.00 10.50 14.00
1972
1973 January Februamy March
8.50 7.2.5 7.00
11.31 10.61 9.94
12.00 9,00 9.25
Apr_l May June
8.75 7.75 3.75
9.99 10.16 9.:67
11.75 9.:64 7.62
3,7_ 4.75,
10.03 9,.43
Ju_y "Au_st September October NoVember Dee.em:be_
3.25 8_00 9...00 12.00
7.84 5..92 8,19 9.74
7,00 7,_12: 6.50 7.50 8.,62 14,00
7Q Table 7
Dage
2
1974 January Febmuamy March
13.63 10.26 14.38
10.06 10.03 9.90
14.36 16.66 14.75
April May June July August Septembe_ October NovembeP December
12.85 17.97 15.40 11.13 12.99 12.14 13.05 17.78 16.53
10.12 10.42 10.12 10.09 9.96 10.14 9.76 9.98 10.03
14.73 16.05 16.71 14.50 15.71 16.02 16.19 17.10 20.84
Notes:
Source:
Intembank and commercial paper rates for 1971-1873 are averages of high and low quotations; 1974 rates ame weighted averages.
Clemente, I. "A Study of _he Money Market 1975, U.P.S.E,, Table 13_ pp. 79-82.
in the Philippine:
71 Table
8
Statutory Rates Percent Per Annum
Effective Rates Percent PeP Annum
Commercial banks Rumal banks
9.14 12-14
12.18-16.78 15-18
Development banks Investment banks Government financed
12 9-12
15 13-15
institutions Insurance firms Consumer finance
9-12 12-14 12-14
14-15 28-32 45-60
12-14 9.75-11.75
60-400
10-14 7-10
16-18
Unregulated markets Commercial paper e Government secumities _ Short-term bills Medium-ter_ notes Long-te1_m bonds
Soumce:
NEC,
7
Philippine. Report of the Inter-Agency Committee the Study of Interest Rates_ Table I. p. 17.
on
*If the paper or bond is sold at less than par val:ue, the effective rate will be higher than the stated rates. For example a bond with par value of _I00 and stated rate of 10% if sold at say _90 will have an effective
ra'te of _I0 = 11.19, _90
7_ Table
9
1972 Effective Lending Rates for Secured Loans of 5 Financial institutions, in %
Institution
Effective
Rate Charged
A
28.80% p.a.
B
24.28% p.a.
C
17.929
D
13.63
D
13.409
p.a.
E
13.63%
-
26.70%
or 27%
- 28.80%
Weighted
Average
Source:
Barrios, Victor S. '_The Evolution of Philippine Rate Policy_ Table II, p. 71.
13.66%
p.a
p.a
Interest
'73
B.
Effect of Interest Behavior
Rate Regulations
Theoretically_ significance strength
intez.est rate influences
of the effect
of income
on Credit
and its sign however
and substitutio_between
Allocation
saving behavior.
depends
present
and Saving
The
on the relative
and future
consumption.
2
The empirical
evidence
of _interest rate-savin_
relation
has been
generally
unclear.
Taking policy
adopted
respectively,
into account
in Taiwan
and Korea
Sicat (1969) pointed
taken as a lesson
for a possible
policy.
There was a drastic
response
to the large increase
the Philippines interpreted
the ?apid
repressive
it showed
Korea and Taiwan suggestion
Williamson
out that these
increase
in financial
in the ceiling in deposit
slow growth
(Khatkate
and the 1960s
savings_n
on both
In a comparative
study
of saving
(1975) concluded
that higher
Korea
rate in In
can be reasonably
high rates
on this issue.
in Thailand
which
as the Philippines. rate countries
1978).
to raise the rate Paid
interest
rate to 30 per cent.
interest
and Villanueva,
may be
substitute
rate policy
in high
interest
experiences
in the past ten years
interest
high
in the Philippine
to the relatively
also grew rapidly
has a similar
successful
in the late 1950s
change
growth
as a response
This segment
contrast
an apparent
such as
They have a_ implicit
time and savings
behavior
interest
in
deposit.
in Asianzcountries,
rates
are associated_
74
with
lower real saving.
observation in the
He suggested
that saving
Asian
household
appear to influence run decision,
and investment sector.
an explanation decisions
He further
the short-run
This interdependence
decisions
was also noted by Hool_y
financial
flows in the Philippines:
saving
based
on the
are highly
noted
that interest
decision
of household
interdependent rates
more than the longsaving
and Moreno(ig76)in
and investment
their
study
of
"We take the position that the Sharp bifurcation between produding and consuming a6tivities does not reflect reality in the Philippine society where households often engage in array of productive activities from farming to small commercial handicraft activities... In the traditional household, consumption and pmoduction decisions ame interdependent and saving and investment activities ape best viewed f-_om the stand-point of total portfoli6napp_oaeh, which considers the assets (and equity) of the households as the pivot of the households total wealth accumulation activities."
Rene Encarnaci6n Report
and empirically
increase
in interest
investment.
investigated rates leads
In a numbe?
coefficient
to higher
the income significant.
that the interest because
the ILO
the contention
that
levels
variable
of saving
on interest coefficient
The interest
Pate reform
it was merely
issue with
of saving
on the other hand was _enerally
fu_the_ noted in isolation
highly
took
for Korea
of regressio_
income and other variables, to be consistently
(1979) further
one element
in a
and rates, was
found
rate variable
insignificant in Korea
an
(p. 16).
He
cannot be taken broad
package
of
75
policies. during
He suggested
the start of the reform,
rates.
Moreover,
was evident, when _hat
Mejia
i
the influence parameters. ductivity model
function
explanatory Income
expectation
weighted
average banks.
rate
model.
Specially
Income
was the source
The nominal
tO minimize
Account
of income
value
were
a downward interest
bias
labor
pro-
and real),
and
on a two-stage rate
of money
calculated
as supply.
through
an
rate used was a by commmercial
rate.
supply were
Development For income,
Authority gross
and
4.5 per
in the interest
rate and money
data.
analyzed
a three-equation,
at the rate below
of the National
and saving
of savings.
ratio,
of interest
interest
loans
He argued
on four key _wth
was fitted
on loan _anted
economy
framework
(both nominal
saving
of inglatlon
rate
model
rate was a function
transacted
Bank data on nominal
The National
Private
Interest
of interest
cent were excluded Central
to the _owth
She used
rate
sources
in 1962.
capital-labor
using the predicted
expected
adaptive
savings
functions.
variables.
and_zhe
interest
at preferential
of theKorean
plan
system
rate of income.
of a saving, ratio
rate,
adopted
from foreign
(1979) in a rico-Keynesian growth
and the growth
regression
develo_ent
have contributed
They are: the saving
a capital-labor
credit
financial
rates
were given
the high growth
its first economic
of the Philippine
consisting
loans
of cheap
observed
, all the above forces
the high nominal
sizeable
a large inflow
He further
it launched
,
that despite
used. (NDA)
domestic
76
product
in constant
1972 prices was used.
indirect
taxes, plus transfer
income.
Total private
savings
was deflated
found a negativeand nominal
This b_ief a p_eponderance
opinion, rate
the more
correlation
and highly
inquiry
She
saving and the was used,
the
The income coefficient
was
significant.
suggesting
a weak
The clearer,and
important#_relationship
relation
relationship
indicates
between
to the writers'
to be expected
of saving
(1970) in a comparative
institutions
It was likewise full potential
through
observed
is interest
their placement
by the relatively
in the mobilization
in
was unable
of capital
saving
funds
rates
Asian
of savings
low ceilings
that the unattractive
and reduce
of Southeast
that the mobilization
the most familiar financial
i ntermediation
study
noted that the Philippines
1976) stressed
deposits,
(1972=100).
into the saving-interest t
variables.
to have been discouraged
(1974,
index
assets.
Emery financial
and corporate
between
and insignificant.
and the institutionalization
financial
of household price
and
of the disposable
When the real rate of interest
of evidences
two economic
composed
significant
positive
gave estimatiS
by the GNP implieit
was negative
consistently
these
savings
rate of interest.
coefficient
payment
Income less direct
on deposit
to mobilize
(pp.384_
on saving
instruments
the flow of funds to banks,
appears rates. its
480).
Tan
and time
discourage
especially
rural
77
and development
banks.
As already
pointed
these rates at low levels discriminates having
is very
here the arguments
likely,
rationed
considering
against
private
would Tend to go first
institutions
applications approved
are submitted
increases
follow-ups
to these
since more
places.
loan.
making
Cruz
aginst
1975).
small distant
a special unregulated financial
borrowers
On the other hand,
rate can be almost
double
set of clients credit
Though
follow
~
the large
are not accessible
there seems
supported
therefore banking
loan
delays
rises
for the
practice
estate,
for loans. of
IL0 1974, Tan 1974, Velasco
market
where
sector
the going
seems to cater
in the cities.
available
in Metro
to the average
to be a concensus
(Tan, 197q).
and availability
businesses
for instance
is
to borrowers
real
(NEC !971,
the regulated
credit
The red tape
the
_n cost
that
It
cost per application
costly
that of the regulated
instruments
institutions
it more
We
loan ceil_ng.
As more
processing
collateral , mostly
These facts lead to the discrimination credit
rates.
are processed.
these banks
riskless
rate
and publicly
banks,
papers
instruments.
criteria
The cost per peso of loans
Furthermore,
relatively
to public
pesging
household
Philippines
than economic
the regulated
of loan applications
from distant
requiring
charging
market
market
of/the
sectors
low-income
money
below
the culture
based on persona], rather
Borrowers
smaller
against
no access to the more sophisticated
may repeat
out in other
The
Manila
borrowers.
that the allocation
of
to
1969,
78
low-cost
credit
is inequitable,
the conclusions. showing
Vibal p?esented
He also
to 90 per cent until wage-farmers allocation attracted discount
mostly
1970).
in the sugar
window
source
in lending
in transaction
the risk,
adequate
to the lender
and Villanueva
activity.
loans
(up
go to the
on the Central Repayment
uncertainty
Such risks cannot
rationing
on the
rates
Bank in these
is the possible
to estimate (1978).
cost as capturing
the greater
information.
Nevertheless
equipment
conducted
transactions
Their
must
It must
be the resources be pointed
about
the outcome
therefore
their findings
work follows
by the borrower.
put to be able to
out that certain
to zero by adequate
information.
of a project
be reflected
are as expected.
cost
not just the administma-
but of the risk of default
cannot be reduced
may be inherent
of funds.
of PNB loans
have not in general,
they relied
An attempt
from a novel view of transactions
The larger
and refining
banks
to credit
cost.
was made by Salto
tire cost of processing
the bulk
are being
of DBP loans
low.
An added complication variation
1970_
Studies
Rural
Instead
as a regular
found rather
until
supports
to the loans of
The loan doss not definitely
industry.
deposit.
evidence
loans went
for milling
of rural bank credit. savings
banks were
cost.
empirical
the loan size distribution
found that
to the sugar industry
collect
little
that less than 10 per cent of total
less than _5_000. went
very
risks There
o_ any
<n transactions Transaction
cost is
79
higher 1.8
the smaller
for large scale to
significant
variation
:banks;
private
the Private bank)
in transaction by their
observation
cost amon_
size.
Corporation
banks,
financial
Development
a fairly high
The study pointed
intermediaries
loans
cos_ of
issued by rural
Bank of the Philippines, (an
cost is from
to the serious
is
transactions
of the Philippines
cost to be added
from
of great
They compared
Transaction
to range
that there
bank_,the
,investment
5 to 7 per cent
into the interest
implication
rate
of this for the
of small scale activities.
The paradoxical
rapidly
Also
development
for small loans,
financial
loans._
risk for small and large
Development
development
their
cost is found
and default
and commercial
on loans.
for small
.'-.
cannot be explained
administration
Transaction
7.3
, i s
int'erest
that
the loan.
market
nature
may be discussed
but it also assumed
institutions. system where cial assets.
The modern savers
of the pattern to close this
artificial
of development section.
segmentation
sector has usually
a well
are able to hold
their
wealth
The rural and informal
urban
sectors
save in the form of physical
assets
and currency
The writers are as yet unable the paper and so refrain from giving more interesting results.
within
of the
It grew and among
developed
in alternative
financial finan-
on the other hand
hoarding
oF borrow
still from
to obtain permission to quote detailed review of its
8O
individuals. resulted
The policy
in an increase
(GNP) or investment i_e finance U.S.
ratio
and Japan.
as shown
Their study
increasingly
more credit
growth
(TBAC-BRF
rate of the financial
particularly
segmentation
Studies
assets5
those on interest
part
the rest
simultaneously Despite
develcped
on rural
that of the the increase
credit from
in physlcal.
show that financial
(about 2.5 Most
in the form of livestock picture
the
is not very satisfactory.
as a consequence
rate
from
of saving
this encouraging
as a whole
transactions
In fact,
evidence-on
was obtained
only a small
system
(IS76).
direct
for rice production
1979).
to total
is not too different
holdings.
book place
in zhe countryside,
relative
and Moreno
also obtained
in financial
and investment
Artificial
by Hooley
In farms_ however,
per cent) was placed
and equipment
asset
offices
assets
in the Philippines
financial
savings
banking
in finanelal
in household
institutions.
to spread
and discounting.
of detailed
regulations
81
6.
Money Supply Function
The literature expanded _odels
on money
from the text-book
which
include
demand
principle
(Meigs,
or money
is the result
credit
development
assumptions
implicit
managed
currency
based
reserve
requirement_
a commercial
deposits. reserves;
system.
bank
function
is allowed
b) they lend the maximum banks
The maximum
of supply
to
and portfolio stock of money,
and demand
multiplier
for
the
is given
"tobe relaxation
of the
principle.
applies
reserves. deposits, to lend
that
units
The observed
reserve
principle
on demand
Under the assumptions
of its reserves.
multiplier
are shown
on fractional
sit the total loan proceeds,
simple reserve
In order to appreciate
the si_le
multiplier
rr_
long been
1963).
in the multiplier
The reserve
have
of the interplay
banking
of the supply
of
Dewald_
of the litemature_
and revisions
means
1962_
in the commercial
functions
for credit by spending
choice of banks supply
supply
Assume
there
DD, 0 < rr
<
is a I.
This
( 1 - rr) of its demand
a) banks keep
allowed; ePeate
in a system of
zero excess
and c) the borrowers
money
loan/deposits,
redepo-
to the extent of -_. rr DD_ that banks
can
Assume an initial deposit of D_. Banks /.end (l-mr) DO . When its loan is redeposited we get AD = (l-rr_D 0 which again is lent and redeposited . Thus the initial deposit of D O generates Amoney â&#x20AC;˘ DO supply -
(rr) "
â&#x20AC;˘82
maintain is DD = I-_--R. rr i isthe multiplier. rr and primary
reserves
Tobin money creating banks lend reserves) units.
R
rate and level
-
treasury
portfolio.
to question
He argued
created
the extent
of
that how much
out of a given
demand
of economic
behavior
keep
level
of
for funds by spending
activity,
of banks
among
argue
_hat warranted
rates.
including
credit
others,
enter
situation
How much
they
since
portfolio.
adjustments
have
instead
Moreover
liquid
they
can
or as a move to achieve asset
A fairly
large
is held depends
literature
60s on portfolio
These
have
direct
excess reserve in tight
on
on loan rate
the
by banks
primary
of highly
lend alsodepends
assets.
of papers
so that they
papers.
of each reserve
on reserve
at portfolio
prime
that the ability
by available
reserves
How much
on these
A number
secondary
and other
in the West especially
money supply. look â&#x20AC;˘
banks.
is beyond
Banks
bills
to the rates
developed banks
credit
reserves.
their relative relative
of currency
function.
from their CB in tight
an optimal
rmDD and
base consisting
Or that banks may lend less than this
keep excess
to
and cash in vault).
on variabiesdetermining
of banks to expand
borrow
the CB
the credit
Works on portfolio
assets
is equal
(1967) was one of the first
depends
reserves.
with
power of commercial
Interest
R
is the monetary
(deposits
(and therefore
in the demand
Its reserves,
behavior
implication
functions,
some
and easy situation.
on
of
83
A related
question
of monetary
that generated
policy when banks
Finally, lending-redeposit redeposited,
widesprea d .
involved deposit
Observed
the reserve where
supply
and portfolio
Tion.
regulations
LDCs
(McKinnon9
lending
1973, Bhatia
In such a case money
supply
function
rXse
units
may differ
mainly
in
allowable intermedia-
in not a few
Restriction
to excess
becomes
of lending,
restricting
1975).
particular-
is not
decision
To be common
and Khatkate_ gives
habit
determining
cost and those
in the
of loans not
deposi_
Countries
are found
rates as we have seen_
leakages
This argument
of the different
bank regulations
their relative
reserves.
is thus the result
process.
forqns of reserves_ Restrictive
the proportion
the demand
behavior
and in central
to possible
multiplier.
of money
in the intemmediation habits
pointed
The greater
in LDC situation
was the effectiveness
are able to tap secondary
(1964)
process.
thesmaller
ly relevant
redepositing
Brunner
some of the models
demand
on
fop loans.
determined
by supply
of funds.
The literature basic
elements
inadequate
of the above models.
model specification
Part of the reason Because
on Philippine
of these variables
supply
The studies_
particularly
is that this has not been
of the legal ceiling
reporting
money
done.
some of the
however,, suffer
from
of the Pole of interest accurately
on loan and deposit has been
applies
measured.
r_ates_ no accurate
The reported
rates
were
rate.
84
thus found not very useful review
we started
and not to give inconclusive
with trend
ment
exhibiting
from external
growth
origin
Of the money supply
public
sector assumed
movement
from _949 to1969
contributed
coming
a large
until 1953 The external ments
predominant
in the beginning,
upward
movement
(IB74) developed
table
setting.
Without
and Castro built
money
supply. Its
is reproduced
works
explaining
functions in detail
an econometric
model
credit
to the
contribution
The t_iaZ
of pay-
sector was not
of these
sectors
from negative Central
bank
role
in the
In the 70s it contributed
supply
than the two other
below.
by Encarnaci6n
supply
move-
and increasing
from the mid 60s. in money
of total
The public
suffered
a dominant
move-
He found
contribution
sector
Money
in the balance
out of the country.
of the increases
Subsequent
surpluses
with
(1970) traced
it by origin.
The relative
assumed
especially
sources,
Zialcita
of money
the pesos
to the government
Zialcita's
large portion
from domestic
The external
credit
sources.
as 20 per cent.
to the increases.
after 1955-57.
a larger portion
a very
through
to the growth
thus drawing
as high
proportion.
sector
irregularly
balances,
to grDw at fairly high rates
and decomposed
contributed
shifted
rates
composed
ment.
In this
analysis.
Money supply was allowed some years
results.
and Castro,(1972)
suited
to The Philippine
the hypothesis of money
and Tan
supply
tested
Encarnaci6n
consisting
of the
85 Table Factors
Responsible for Movement in Money of Internal Origin, 1950-1969 (Percentage Distribution.)
Item
1950-53
1954-57
1958-61
1962-65
1966-69
100.0
I00.0
i00.0
I00.0
100.0
Government
49.2
58.1
47.2
38.9
56.9
a. b,
36.3 12.9
34.6 23.5
21.2 26.0
13.9 25.0
13.0 43.9
Sector
50.8
41.9
52.8
61.1
43.1
Bank
53.0
59.3
52.5
50.9
47.8
47.0
40.7
47.5
49.1
52.2
Money of Internal A.
Origin
By end-user i.
2.
B.
10
National Local
Private
By source 1.
Central
2.
CommeTcial System
Source:
Banking
Zialcita, E. P. UMoney 2nd Semester, Vol.
Supply Movements in the Philippines_ IX, No. 2_ p. 190.
_EJ,
86
following
five (5) structural
equations
and one (1) identity
(pp. 215-
217).
1.
Zb
=
288.90
_2
2.
Zm
=
=
+ 0.3862 (2.83) .987,
1004.39
Lcb_l
s = 73.46,
Z
3.
=
Z
=
.995,
1038.13
:
Bg-1
+ 0.3657 â&#x20AC;˘(3.03)
F 1
D.W. = 1.536
+ 1.4284 Zb - 70.200 R
i64.57) _2
+ 0.3837 (11.39)
(-8._6
s = 62.96,
+ 1.3756 (53.39)
122.03 + 0.4127
Zb -
DoW. : 70.564 (-7.30)
1.554
Rr
Z
C
m
(70.07) _2
=
.996_ s = 24.17_ D.W.
= 1.595
a
4.
=
Lbp
_2
333.90
=
+ 5.679_ (6.04)
Za - 246.231 (-3.53)
.980, s = 301.87,
D.W.
R r + 416.439 (2.42)
Rb
= 1.117 a
5.
Lcb=
-953.784 (-2.33) _2
6.
Za
:
=
- 32._4540 Rd + 68.5993 (-2,33) (6.51)
.996, s = 77.60, D.W.
Zb - Z c
= 1.402
Rr + 0.2116 (15.21) (1952-69)
Lbp
87
Z
=
currency
c
in
figures
circulation,
over
F
=
International
Zm
=
stock
of
the
average
of
end-of-month
Z e plus
private
year.
reserve,
money_
equal
to
demand
deposits.
Zb
=
monetary
Z
=
available
a
base,
reserves
average B
=
of
Rr
=
the
Rd
of
debt
=
of
Zc plus
the and
Za.
commercial end
outstanding
banking
of year
of
the
system,
figures.
government,
end
year.
ratio of required commercial banking end
to
of beginning
internal
g
equal
year
reserves system,
figures,
Central Bank in percentage
in
to total deposits in average of beginning
percentage
rediscount units.
rate,
the and
units.
average
over
the
year, 1
=
weighted average of in percentage units.
interest _
rates
charged
by
banks,
a Lbp
=
private domestic credits of the commercial banking system, average of beginning and end of year figures. = Central Bank loans and advances to the commercial
a Lob
banking Following by
the
monetary
requirement. F, B
g
and .
the
CB
The
c_edit authors
monetary
base
government
issues
to be
of
part
traditional
base
But
of
base,
commercial
did
not
Zb,
why
equation.
Their
are
by
their
bought
primary
is
reserves.
beginning supply
reserves
determined
Lcb, the
reason
the
of
money
available
banks_
explain
average
funcZions_
consisting
monetary to
system,
and
the
variable, was
Central This
g
or
by
transaclion
or
reserve
reserves_
government B
end
deter_nined
foreign
probably
Bank
is
and
by
and
, was
debt,, used
because
most
commercial amounts
in
banks to
an
year
figur ...
88
imdirect_ending
of CB to the government
banks are used to buy government government
security
the proportion
issues,
purchases
_e
allowed
by financial
alternative
assets
reserve
therefore
as primary is zero.
the amount
deposits
expansionary
reserves
The ]eve]
of Central
of
depend
Banks Would
given
on
tend
that the yield
of outstanding
Bank
of
impact
intermediaries
that can be used as primazyreserves.
to hold the maximum
appmoximates
since reserves
lending
on
debts
to the
government.
The monetary of government expanding loan
base
equation
and commercial
money supply.
bank borrowing
This
is to be
to banks and to the government
impact on money supply. conclusively discounting
yet,
been used
Alternative
is used
as a regular
tions and private
source
commercial
discounting/loans
schedule
of such ratios
The discount
rate also varies
more
The discount
Bank
banks
with the priority
fully
window
Bank.
_anked
the has
institu-
can borrow
activities
on the priority
for
banking
by the Central
used for various
This in turn depends
Central
Lcb cannot be taken
tO capture
The amount
is allowed
Bank in
and specifications
and tested
banks.
influence
the same expansionary
of funds by both public
ratko is
since
equation
in the Philippines.
on what
or generosity.
expected
hypotheses
equal
from the Central
will have
The discounting
need to be developed
way this window
shows the almost
depends A
in terms
of the period.
given.
Nevertheless,
89
the window
is a generous
or semi-public
Cumrently
rates
on security
questioned equation
whether (5).
an exogenous
borrowing
is not sensitive
the function
g_ven below
became
a change mote
loans.
to hypothesize
to the government,
and tested
The highest reasons
in the coefficients
lax on govemnment
R2
=
14.4
=
.30
+
.199 (3.302)
R +
.011 (.109)
as
The assumption
allowed.
And,
rates.
is evident
such
She posits
B + .704 RL g (.173)RD
data:
was done
as monetary
She obtained
(1953-1960) M
such as
to banks
up of the series
borrowing.
rate
Tan (1@74)
a function
following:
1.
rate ranges
it on two Sets of quarterly
The breaking
20
government
take CB loans
to the loan and discount
1953 to 1960 and 1961 to 1970. to see whether
and other
to the limit
bet-
loans has been very
For these
is to simply
tend to borrow
The margin
Rediscount
in rural
commercial
like loans
public
from 14 per cent to about
to loan rates.
An alternative
here is that banks
policy
loans
it was meaningful
variable
banks.
and maturity.
to 8.0 per cent for regu!am
still gives a wide margin
for the three
even for non-priority
4.5 per cent for priority
banks
of funds
commercial
legal loan mate ranges
per cent, depending from
source
banks and the private
ween loan and discount large.
and cheap
the
92
where
r
is the relative
variables
that determine
Money supply basically and how much
lending
bank
deposits
of government Foreign
reserves
equation
therefore
strongly
interdependent
Without process
c
=
a model
a reserve
other parameters
they mentioned
loans-demand
deposits
the 10 Asian
countries
Z
=
given
independent
Zb,
the
includes
the
by government
variables
The
or at least
of the money
supply
_eneration
equation
f (A, c, t, z)
to demand
For the Philippines,
determined
multiplier
is the ratio of currency
differed
transact
are also part of bank liability.
redundant
of time deposits
variables
of funds.
and currency
Bank liability
bein$
are OTher
ones.
building
they posited
Z
where
includes
x
sources
reserves
the system
these
and
and secondary
requirement.
funds,
assets
on available
and borrowing
base and reserve
B . g
of various
lending
depends
monetary
debts,
rates
to demand
deposits,
process. including
as expected,
and
x
deposits,
other
Both equations
leakages
were tested
and Burma.
and so with
(.336)
from the
on each of
the value, of the coefficients.
+ 1.032 g
(.160)
of
The significant
they found
994 - .146 F + .186 B
is the ratio
is my interpretation
as indicating
Japan
t
(.099)
CL
93
R2
(The values
=
.885
in the parentheses
It is interesting from those of the annual.
are the standard
to see that the quarterly It is hard to believe
reserves
or government
debts
of money
supply.
contrasts
multiplier
This
equation
Z
=
R2 =
is an insignificant
+ .929 (.106)
A -
t.
for the reserve
Ordinarily,
is expected the increase
level
to be negative.
for time
in time deposits
This tends to contribute
resultsamong
deposits)
relative
savings.
are more
foreign variable
model,
The
results.
t
countries
with
the right
and positive
money
deposit system,
supply
sign
loanable
The results of Tan's work.
did not give a thorough
--
for ratio
however,
(and
the institutionalization
to the total
those
c
financial
to total
may indicate
of the multiplier.
consistent
for
and of
deposit/demand
In a developing
to demand
tested
c + 3.45 (.923)
A, negative
the coefficient
of weakening
explanatory
gives bette_
_$.195 (2.780)
differed
'that neither
Encarnaci6n/Castro's
are significant
therefore
instead
results
.968
All the coefficients positive
with
fo_ the Philippines
1530
errors,)
funds
of
of banks
of the two equations The comparison
explanation
why the
of
94
countries
behaved
differently.
We may conclude specification functions consider
m_d measumemeht
developed
and tested
stock adjustment
exogenousvariable conflicting
this section
of interest
rates
so thet the short-run
from quarterly
This might and annual
to the pmoblems
of
found in the supply
in the Philippiens.
is distinguished.
results
by pointing
Future
work should
and long-run clarify
semies.
impact
of
the seemingly
g5
7.
Inflation
Several post-war
price
studies
movements
covered
and theoretical
exerted
a stronger
Though
have identified
in the Philippines. framework
influence
most of the studies
expansion, of goods, factors
they placed particularly
were not deemed
imported
factors
by inflation long-run
trends
than
greater food,
in prices
movement
quantity
theory
function
of changes
inflationary
rate is decomposed to inflation. contributing supply
to inflation
inflation.
wherein
a
price
were
structural
the sector.
big spurts
in prices the
used a
are taken
was used.
to be a of specific The inflation
contributed
in the major
to shifts
in 1973
explaining
In explaining
of items
increase
then traced
in
with a lag_
into those
In the studies
approach
of the price were
changes
groups
Cost push
determined_
the authors
and output.
supply
and the oil crisis
be grouped
level,
monetary
for the cost push
inflation.
to find out which
The causes
affecting
price
in demand
experiences
in domestic
shifts
and thoseâ&#x20AC;˘ explaining
of general
framework
on
increases
such as the 1964-,65 and the 1973-75
were seen to have
pull thmough
here except
might
on the period
the demand
from devaluation,
The studies
long-run
Depending
affecting
on the rate of inflation,
in explaining
wage
of factors
some factors
others
weight
relevant
Otherwise
rate_
used,
considered
resulting
and later years.
a number
most
components
in demand or inl :_
96
It is useful post-wam
period
%o note that p?ice
is somewhat
J-shaped
Table Consumer
as shown
43.7 q2.5 42.8 41,9 41,1 39.6 39.7 40.2 41.7 42.5 43.5 45.9 47.0 50.1 54._ 56.8 59.2 62.4 66.5 69.8 73.0 83.4 93.7 100.0 116.5 156.3 166.9 182.3 200.4
1978
216.4
CentralAStatistica
I Bulletin
II below.
11
,CP_I_I
1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1953 1964 1965 1966 1967 1968 1969 197o 19?1 1972 1973 1974 1975 1976 1977
since the immediate
in Table
Price Index and Money Supply 1949-1978 (1972=100)
Years
Source:
movements
Index
MoneY
Supplylndex 16.01 19,00 17.94 18,52 18,93 18,97 20,67 23.19 24.73 26,90 28,52 29,30 34.30 38.72 45.67 44.42 47.41 52,11 58.47 61,55 73.48 72.60 80.05 100,0 112.33 139,23 159.4,4 186,64 203.18
(as of August,
1978)
(as of June, 1977)
97
The consumer
price
index in 1945 was almost
Then prices
started
declining
lap, ely from imports
as domestic
increased.
This
The mid 50s_ then it gradually
moved
from the mid 60s to The present Pose by 23 per cent between
up.
A.
Food Price Changes
Treadgold Philippine
inflation.
of either
quantity
He pointed
existed
and movements
duping
and Other
Causes
inflation
may occur
The same a_gument
1950 to
1955.
with
And, a broad
fop a large part positive
association
price
of food
He used a structuralisT of general
of economic
excess
was used to explain
demand,
and population
for food to rise more rapidly
supply was observed
nature
price behavior.
and relative
in the absence
on
the aggregate
accounted
level.
after
Spurts
to write
movements
if the processes
supply.
index
era.
in explaining
price
ape such as to cause the demand
Food
two decades
theory
in the absolute
that even
price
The index Pose
of Inflationary
He was not satisfied
in the over-all
arguing
up to
of The Pate
The Consumer
(1969) was one of the first
movements
goods,
continued
1973 and 1977.
the Cuaderno
of Keynesian
framework
Trend
in the first
price level movements.
between
of cons_,er
An acceleration
is evident.
rate
out that food price
of over-all
the 1938 level.
1965 and 1969_ by 60 per cent from 1959 to
at less than half the 1965-78 especially
supply
downward
1973, and thmn by 72 per cent between
independence
10 times
_owth than
The fall in price
To increase
more rapidly
from than
98
demand.
Treadgold _he relative explain
between
price
from the inflation
five and sLx times
after
domestic
Despite
the fact that
to the price of export
not grow fast enough. progress quality reform
hi_her
agricultural
food prices
in the agricultural
bill of 1963 which land.
non-food crops.
Other reasons
of land; additional
cultural
in relative
Export
The
than
prices
on the
in 19_I.
He
production
period , food supply
to the prices of non-agricultural relative
For
towards
food crops (p. 184).
Fom The 1955-1965 demand.
inflation.
food prices wer_
than in 19_I.
directed
to
goods to
the war accelerated
The 1946 absolute higher
these price signals
and exports
that the shifts
other hand, weme only t_hr_e to four times a_Eued
on farm response
and the 1955-1965
he noted
in food production.
role
consumed
decline
price decline,
resulting
recovery
an important
prices of domestically
the pre-1955
the pre-1955 prices
placed
sector;
produced
products,
Consequently,
increasing quota
uncertainty
Its effect was expected
behind growing
rose absolutely
Were cited:
U.S. sugar
lagged
and relatively
it did not rise food supply
slow rate of Technical scarcityanddim_nish_ng
and the agricultural over
to be worse
ownership
Cluni_s-Ross
(1966)
also studied
land
of agri.
on domestic
production.
Earlier_
did
The 1962-64
food
99
inflation.
He focused
contribution index
--
of food price increases 25.4 of the total
in the prices Ross
of non-food
the fast growth
construction rise
increased
exportems accuracy
of upward and adjustment
Clunies-Ross'
output
Treadgold's
Bautista
in t6'major
components:
food
Typhoon
items.
inflation
oil crisis_
Yoling
and
that the rapid
factors.
in money
Indeed,
income of
was some debate on the production
twice
Ross made
Nevertheless,
growth
that of food even
in his study of the 1960
the rise
in consumer
c,fothing, housing,
His table
than half of the total increase
this period
appmoach
first decomposed
In all three periods,
duming
to Clunies-
transportation
in this sector.
was about
low increase
adjustments.
inflation,
devaluation,
A remarkably
of industrial
the slow price movement
on the IS72-74
rise in the price
however,
of the rise There
exclusive
According
He argued,
the devaluation.
Following
rise.
in manufacturing,
as a consequence
and miscellaneous
to the total
items was observed.
for this.
rate of non'agricultural without
and almost
could not be due only to supply
following
to explain
large
29.1 points
of output
accounted
in food prices
â&#x20AC;˘demand
on the extremely
and iight
is reproduced
food price
he pointed
was exceptionally
did not only destroy
in money bad.
and water
contributed
price
out four causes:
and increase
index.
more
Focusing
bad weather,
supply.
The weather
The floods brought
producible
index
below.
increases
of ,the Consumer
price
farm capital
by
but also
i00 Table DECOMPOSING
i_
THE CONSUMER
PRICE INFLATION
No. of points rise, CPI fo_ Manila
Percentage Contribution
1955-1969 All Ite_: Food Clothing Housing Fuel, light and watel Miscellaneous
45.7 59.0 40.6 30.7 28.4 26.5
i00.0 60.6 5.0 15.2 2.5 1.6.7
70.5 94.4
100.0 58.1
CloThing Mousing Fuel, liKht and water Miscellaneous
108.6 38.6 76.1 48.7
8.1 11.4 4.0 18.4
All Items Food Clothing Housin_ Fuel, light and water Miscellaneous
64.4 83.7 99.8 14.1 176.9 49.3
I00.0 56.5 8.1 4.6 10.3 20.5
1969-1973 All Items Food
1973-1974
Source;
Bautista, Romeo, "Inflation in the Philippines" in J. Encarnaci6n, et al., Phi iipp_neEconomic P_oblemsin Perspective, University Economics, Quezon City,
of _he Philippines I@76.
School Of_
IDI
silt the soil in Central Besides,
The recovery
was therefore
1972 to early 1973 was also a good period
for primary
p_oducts.
high.
Furthermore
cent.
Consequently
further
Luzon.
domestic
Prices
of sugar,
copra
the peso was devalued output
supply.
and no compensatory
was probably Money
reduction
supply
from
from other
late 1973 the oil price was doubled,
in the world
market
and rice weme abnormally
in early drawn
slow.
1970 by almost
into exports
t_us reducing
externalorigln
sources
50 per
increased
was undertaken.
and redoubled
In
in The early
part of
197_.
.The analysis gave the supply was provided resulting
focused
thepossible
The effect
on estimating
an impact
the impact
no clea_
supply
of the oil price
using the 1969 input-output of about 22 percentage
in the CPI 1973-7_.
and money
table.
points
Using
over 5-yeam
positive
_elation
on prices
used.
The study
two-thirds
The same
in
The author
hike on the cost of
in the rise
of about
and
supply
incPeases
evidence
especially
of increases
of the data and method
This means a contPibution
cent rise
of goods,
the devaluation
He found
of money
Bautls_a
no empirical
impact
of prices
%o 1969-73.
be made yet on the basis
production
index.
rates.
supply
and following
growth rates
from 1955-60
in the gmowTh cannot
In analyzing
somewhaTuneven.
Nevertheless
in domestic
from The bad weather
he compared
intervals
fac%ers was
side a lot of weight.
To show changes
world shortages. demand,
of these
estimated
in the consumer
p_ice
of the 35 per
input-output
TecHnique
as
102
Bautista's,Mijares
(1971) estimated
the effect of the 1970 devaluation
on the CPI to be as much as 12 per cent.
It is to be noted by a rare coincidence the oil crisis. rapidly.
that
of several
the 1969-74 factors:
At the same time money
will expect
fact_ the past months'
experience
already
kind and the_e is an excess
1973-75,
th_ Central
inflation
Bank
rate observed
In
The weather
of rice.
a tight
as of the writing
to grow very
the same occurrence.
pressure.
supply
is following
and
indic_utes that enly0PEC's
the 1979 inflationary
has been
devaluation
supply was allowed
pessimists
is causing
was caused
bad weather,
Ohly extreme
new price
inflation
credit
of this
And unlike policy.
;paper
in
Yet the
is 21 per
cent.
B.
Long-Run
Price Movement
Some of the studies the structural Ross
analysis
of particular
(1966) and Treadgold
tigation
Later
their own price
The price equation
price equation
included
Encarnaci6n
which
were part of
experience.
in their
Clunies-
work an inves-
et. al. (1972) and
functions.
of Enearnaei6n
macro model of the Philippines structural
price behavior
inflationary
(1969) both
of the price trend.
Tan (1974) fitted
of loDg-run
eto al.
on 1950 to 1969 annual best compares
with
was part of their series.
earlier
The
works
gives
103
the following
results:
P = 85.37 - .00_3 Y (-7.71)
Z (18.22)
wheme Y is real GNP and Z is money
Instead money
supply,
of regressing
Clunies-Ross
.06.
He cautioned
correlated causes
against
variables.
of the 1962-64
supply
variable.
fop much of the variance money_
failed
variables
for changing
to consider
changes
in velocity.
rose mope than twice between occurred high
in the 1960s,
interest
rates caused
tends to offset
According
argued
that
the increase
the impact of restrictive
Most
in the serially
supply of money fitted
variables
his
accounted
that velocity he noted
of
this,
and Tan's works to Hooley
also
(1965) V
of the increase
t_ght money
in the value monetary
only
real GNP as his
Though
Encamnaci6n
1948 and 1963.
Hooley
using
He also observed
V was made.
that for
R2
Treadgold
of these
this period.
of
the structural
had both
1946-65,
that the variance
duming
with
to stress
of price,
levels
He showed
high correlation
All studies
in prices.
V, was not constant
no adjustments
differences.
fop the period
He found
on absolute
was not significant
inflation.
to annual data
prices
gave him reason
and goods as the explanatomy function
absolute
interpreting
This
.94 1.99
supply.
used first
1955 to 1965 data, the relation
R2 = DW =
situation
of V.
policy.
and
Such rise Over Time
V
104
mose
from about 4 in the S0s to about
explained
by the growth
of the financial
In the light of other specifications et.
of the long-run
measure
The coefficients of the monetary
of consumption t:he external failings
a long-Pun
however,
Short-_un
state which The system
achieving
a long-run
may well he a disequ_l_brium
explains
equilibrium
must pass
equilibrium.
be used.
Both the flow and stock
in terms demand
as a good supply
The effect
of
Some of these
price
Otani
(19"75)
adjustment
can be viewed
through
In effect
state
supply and
Further_nore, domestic
â&#x20AC;˘paper by Otani.
which
Encarnaci6n
of money
has To be considered.
temporary
position.
relationship
than GNP should
flow model
equilibrium.
that such simple
as in Treadgodd,
be interpreted,
in a subsequent
a short-run
it seems
impact on prices.
likewise
are o_ercome
developed
cannot
of goods rather
sectoP
resu_ts_
a rough
This may be partly
system.
functions
al., and T_n give at best
prices.
8 in the 70s.
toward
as a
in the process
such a short-run of the long-run
are equal
of
equilibrium
equilibrium
to the supplies
in
The latter.
There are three from short-run consisted
flow equilibrium
of a real
cash balance
and impmmt equations.
i,
'
equations
These
describing
towards stock
the adjustment
the long-run adjustment,
are as follows:
processes
equilibrium.
price
adjustment
These
105
I)
h log (
)t R2
2) h
=
-4.77
=
.34
A log Zt
(log Y
=
t
- 0.29 pe1.21 . 0.83 log (_)t-i M_ (-2.73) t (-3.94)
- log _)
t
0.77
D.W.
-_.27 + 0.99 log Y = (3.5_) t R2
lo E Y
D.W. = 1.05
log Pd t = -0.004 + 0.21 (1.00) =
3)
(4.01)
(6.69)
pe t
(6.25)
= 1.97
Pd + 0.61 log ( )t t-1 (.78) _Z - t3.69) 0.68 log Z
0.42
D.W.
= 1.54
Notationally, M_
=
average
P
=
the general
Y
:
level of real
pe t
=
expected
â&#x20AC;˘ )t = d A log [_
stock
of nominal
price
money;
level_
income;
rate of inflation;
.M*)Z-I L -log (_)t d " log [_
d
=
adjustment coefficient in the equation.
Y
=
the "normal" level constant mate;
Z
=
volume
Pd
=
_he price
of
_/
lying
of output,
between
which
zero and unity
is increasing
at
impo_ts; of domestically
pmoduced
and cons_ed
goods;
â&#x20AC;˘ 106
Px
=
the domestic
price
of exports;
Pz
:
the domestic
price
of imports;
The estimated
equations
in the Peal cash balances,
domestic
well the model as a whole simulation
exercise
of the structural
of credit
&O% increase general domestic
was carried
other results expansion
in domestic
prices
traces
credit
The author
The elasticity
was estimated
m_ey
b3 of equation
explained exerted
supply
out by making
in earlier
swings
To see how
in the economy,
use of the reduced
a form
papers,
is found
to be rather
noted that its impact for the longer-Pun
elasticity
reflects
of short-run
at about
5 (the reciprocal
(2) above.
In the short-run
a relatively
pressure
weak effect
on prices
a
of output
impact multipliers,
is found
Otani
of goods,
of the estimated purely while
external credit
The impact of
run.
It is to be
to be nil.
obtained
of
rigidity
supply
on the same.
is felt more in the longer
on growth
small,
in the prices
this weak impact
most of the upward
on inflation
the immediate
lead to a 0.5 per cent rise in the
argued
or a high price
expansion
the major
and inputs.
actual movements
on prices
in the economy
factors
prices
level and a 0.7 per cent increase
goods.
coefficient
quite well
equations.
Unlike impact
trace
Solving
the following:
107 Table
PHILIPPINES:
FACTORS
19
AFFECTING
INFLATION
(In per cent)
P rcent change ge inobserved rate of inflation Observed _ate of., inflation _/
1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975
4,8 4.7 2.0 8.4 6.8 2.5 5.7 2.3 1.4 1.7 21.8 18.2 12.4 18.1 52.1 9.4
Source:
Extemnal^. factoPs _/
• 72.9 59.6 255.0 50.0 11.8 40.0 21.1 --42.9 94.1 81.7 42.5 33.6 84.3
due to;
Lagged endogenous
Domestic
variables_/
factors_ /
-129.2 55.3 130.0 -29.8 110.3 180.0 28.1 278.3 157.1 117.6 -68.3 64.7 40.4
-20,8 23,4 -10.0 8.3 .... -24.0 -1.8 17,4 -21.4 --1,5 -1.8 ---
Unexplained changes in observed inflation
•177.1 -38.3 -275.0 71.4 22.1 -96o0 52.6-195.7 7.1 -111.8 19.8 -9.0 1.7 -24.7
Ichiro Otani, "Inflation in an Open Economy--A Case Study the Philippines_" IMY, Staff Papers, Vol. XXII, No. 3 (November 1975).
of
/
I__/In terms of wholesale consumed goods.
price
index of domestically
produced
and
2/ External factors are expor_ and import prices and volume of exports. _/ The pressure on prices of the economy slowly adjusting tO changes duping previous periods. 4/ Domestic factors: tmend value of real GDP and domestic cmedit of the banking
system.
I08
The papers post-war
inflation
bring us a long way to understanding
in the Philippines
inflation.
Otani's
conclusions
about the impact of monetary
Clunies-Ross, because
Encarnaci6n
adjustment
external
the effect
and only weakly long-run
of money
supply
in the short-run.
impact on output.
is the very heavy
in high inflation
supply
has been
increasing
not neglect
researches
may focus exclusively
particularly
the supply
in the Philippines
The literature
testing
and their and the
and import
effect on domestic
prices.
import
side.
conclusion
exerted
It seems
from the studies
by domestic
FUture
works
is danger
obvious
mainly,
it has no
foodsupply,
that the pressure
There
on the mope
that
In
On inflation tha_
espe-
of domestic
over a decade. of savings
investigation
and in the Rural
on savings
future
causes,
It evolves
function.
Sector
in the Philippines
from works
aimed
The most recent works
of saving behaviour
and portfolio
spans
only a
at estimation include
choice
food
should,
the oii crisis.
Savings
little
Both in the long-Pun
in this decade.
therefore,
arises
variables
It is to be noted
pressure
periods.
made by
was felt in _he longer-run
An equally
inflationary
cially
The conflict
in export
of
conflicting
on pmices
in exogenous
such as changes
were found to exert the strongest
contmast_
8.
and Tan.
to changes
factors
expansion
of
the process
in a way the seemingly
impact were not distinguished.
short-run, prices
Bautista,
short-run
long-run
paper reconciles
and to some extent
causes
to
an
in the agricultural
109
sector.
This review
The section providing given
traces
is divided
into two
an independent
in national
the historical --
estimate
income
progress
a) estimation
That would
accounts;
of the literature. of savings
corroborate
and b) savings
aimed
at
the figures
functions
including
rural savings.
a.
Estimation
of Savings
Rate
Early calculations independently
estimate
added of various sources.
estimates
sectors.
Economics
of investment,
were made. was
consumption.
Among them were
of Agricultural
Consumption
used until
of national
the Securities
depreciation,
1965 hence,
It Turned
personal
saving was negative.
Auditing
taxes
Since
by the residual.
was understated
leading
to correct
estimation 1951-1960.
Hooley
during
these
consumption
this possible
work leading
error,
Independent
expenditures The method
years
asa
or in the Total
that
of consumption. undertook
and
estimated
was calculated
Savings
Bureau
consumption
components
Hoo!ey
to his 1963 monograph,
Office.
of
(1963) contended
to the overstatement
Commission,
of GNP.
estimate
any error in any of the expenditure
is absorbed
from value
and Sovernment
as a residual
out that
did not
came from different
and Exchange
no independent
was made.
attempt
incomes
and The Government
was taken
accounts
GNP was obtained
Data on sectoral
savings
residual,
income
investment In an
a major in the Philippines:
110
Hooley for households, capital assets
corporations
gains or losses.
especially
industry
account
holdings.
reconstructed
construction
and consumer
in principle
was the method
spending
units separate
was involved
in getting
national
reasonably from
accounts
high.
consists
of physical
and government
statement.
These
assets Were
of estimation were
were
adjustments
accounting financial
Bank reports
taking
income
account.
used.
Fo_ each g_oup
used.
Careful
tried the income results
obtained
differed
significantly
residual
method.
It was positive
Moreover_Hooley
to total
approach
found
using
savings.
reestimated
Ho01ey's
in 1967 with
work
that the saving
from that of and
rate accelerated contri-
In the same study9 he also
the '_disappearance" method.
and that from the National
Following
of
the estimates.
using
two-thirds
for
These
and tedious
11 per cent in i@58 to 17 per cent in 1962 and households
buted almost
into
from the same source
in the national
data sources
needed
data on their
obtained
includes
and f_nancial
savings
and comparable
from Central
durables
The saving rate the
sheet
in net worth
In this case saving
For households,
Physical
to the change
and government.
classification
of depreciation.
were mainly
as equal
Corporate
from their balance
to get a uniform
saving
Net worth
net of liabilities.
obtained
assets
estimated
Income Accounts
The
are presented
work the NEDA had the national
independent
estimates
for consumption.
below.
accounts
rH
o 0
o
U') O_
co Z
o
@. : ."1 Q O0 ,--I u') 0"* cw U') b- ,---t L_ 0'_ co ,--I ,.D (N L_ U-) O 03 0
_
'_
O_
:
,_
,o
_
c_
r_
_
._
o_
= ,_,
_
_
_
_
_ r..,0 @
,.-I
_ _-_ _ ._ ,_ o_ 0..-_uD
•
CY ',,
tO
r-
::_
4_
Z:
•
,_ ,.-I
o
_:_
_
ol
• ,......
_ k_ .,-I
0 O--
0
.H "O
_
_ _'-_
_
O ,_'
"_z_
_ ,,_
f..1 .._
,.Z::l _._
:_ _o _ _._
0
0
,_
0 o_ oa ,-i
O
_=
"_ _t_ _
%.
v_
"_ __ __
_
o 0 U3
F_
'._
_
I ,,,:d
: _
_ . ,.-4 _1 r.-..I,.._,,...do4 oo ,_ uo ,,-I o,..1o.,_o"_ [--., u_ ,.-i ('o un on t'N
_ o
'_
_ _ _ o
_: o
0
o ....
E_
_: _._ _ O (D
,_'_ _ _ _ _ ,'-'_ ,-I o") [".-. _.1-o9" ('w c,< u':, _1- o
•_.
•_ 0 ¢J _
c_ O
0
-._
0
o
0
0
_
0
_
t_
ch on o
_1- c_ c_ oq c_ u"_ c_
_-__-_c_ c_ cw =_-=_ v_ u_ _
i
_
_
i
_ 0
•
_0 0_ 0
.-.l"O0_--IOOt"O_,t')O_t"...
...,M00 CO O) ('O O0 P'-. L.O *
0
o "0 .,"H
I
0 to
"0 r,.D
0
o
,--.tcN oo _-t L._ _r'--. ,-'l,"_,-'l,-4,-.toq,--I_--I_-I,.H
112
The data base was tremendously the new series gives a more were revised
expenses
according
information:
goods,
taxes,
interest
survey
asking
for both statements
Saving
was estimated
and disbursements
into current
The estimated
factors
holdings
sectors.
Among
their
a) The manufacturing two
(2) pep cent of firms owned
controlled
categories
These were
of financial
major
sector
findings
chosen
intermediate
obtained
The trend assets
structume
a
and the out-
and balance
in net worth.
They were also able to give The industrial and banking
provide
and the portfolio
of operation
particularly
flows
like payroll,
and depreciation.
as the change
The flow of and corpora-
and physical
production
this work
government
saving
to financial
pursued
estimates
years.
for 1950-1962.
households,
was also traced.
lay for the different
and portfolio
--
50s so
P?e-1965
for all post-war
with Moreno,
The flow of receipts
of interesting
classified
sector
the 50s and early
set of accounts.
study of flow of funds
funds for each spending tions was studied.
since
series
in collaboration
in a very important
number
reliable
to give a comparative
Hooley,
and capital
improved
of
from a
sheet. of saving
was analyzed. manufacturing
are as follows:
had a high concentration
60 per cent of assets
ratio,
and i0 per cent
90 per cent of assets.
b) Financial
claims grew rapidly
in absolute
terms,
and in r
relations
to GNP i.e., from _500 million
to _3.5 billion
from
.
1949 to
113
1962, and from 10 to 30 per cent of GNP over the same period.
This
rapid growth implied an increasing proportion of investment being financed through financial institutions.
The increase in financial
assets _eflected increased holding of currency_ demand and other deposits.
c) The upward trend in household saving rate observed in Hooley's earlier study continued: it rose from 11 per cent in 1958 to 17 per cent in 1962. a very low saver.
The government on the other hand, was found to be
Its saving rate declined from 13 per cent in 1958
to 9 per cent in 1962.
Its contribution to saving was then minimal
%
during this period since its revenue accounted to less than i0 per cent of GNP.
Corporate saving rate, especially of financial institutions,
was also high
--
64 per cent in 1958 and 69 per cent in 1962.
d) Though financial assets were rapidly growing they found that commercial banks relied on plowed-in profits for almost onethird of their loanable funds. with other countries.
This ratio was extremely high compared
Accordingly, this reflected the failure of
commercial banks to channel more savings into the banking system.
More-
over, most of the financial growth originated from commercial banks,
It was also found that the payroll's share in the expense flows for corporation was low compared with other economies.
Besides,
114
_t declined in 1962. sector_ most
from about
25 per cent in 1957 between
Prior to 1957, it was about wages
and salaries
constituted
i0 and 12 per cent
20 per Cent.
For the household
less than half of total
income
of them from ent_epreneurships.
Finally, capital tended
the possible
expenditures
was estimated
to encourage
and financial investment
household
capital
variables
component
They
found
in inventory to income
of credit
that both
influence
on
income
in explaining
was apparently
for both
the
corpomate
and
sector.
and Vasquez
(1979) reported
the three sectors by NCSO.
data on the flow of funds were
(1977) extended
Supertiehoso
-
the corporate
households,
team in 1977.
Credit
Lastly_
and the Business
generated.
flow of savings
on the 1974-76
Research
(Technical Foundation)
analysis
in the form of reports
-
produced
by the IMF-
Board for Agriused flow of
data in their work on the saving of farm families.
rather brief
to 1975.
and corporate
data were studied
TBAC-BRF
Moreno
flow of saving for each of
government
The 1974 NCBO flow of funds
CBP survey
saving
Changes
intermediation
that availability
a significant
that responded
More recent
cultural
arguing
expenditures.
exerted
in fixed capital.
only capital
impact of financial
So far a
was done on the NCSO data.
None was done by Moreno
and Vasquez.
The IMF-CBP
only a page of analysis
of the 1974 NCSO data.
1977 Report Despite
this
devoted shortcoming,
115
the new set of data built provides
future researches
and portfolio
Supe_tichoso (compared
estimated
1974-1975,
porate
saving rate
Supertichoso
from _20 million
Billion positive
The share
that net income
These wide
dumlnZ
of non-bank in 1976.
in which
of cor-
institutions with
the ac-
part of the 70s.
institutions In 1974,
might
these
share
coincided
the early
fluctuations
rates
financial
This rise
In
rate but it
The relative
the non-bank
market
of interes_
15 and 18 per cent
the 1958-62
in 1976.
in the money
rose
net income
have, been _ue to
institutions
were
in.
The financial external
level
in 1975 to _660 million
the wide movement engaged
doubled
share.
was only BII2 million.
It
For 1974-76_
of 17 per cent for 1962).
financial
reported
findings.
tO the 45 and 51 per cent range.
up so also with
to the total
transactions
to be between
rate
saving _ate
to the previous
saving went
at the 1962 level.
down however_
government
back
relative tive
went
to the 1958-62
areas.
stabilized
to the Hooley-Moreno
of households
links
with a very rich data base for work on saving
choice and related
Saving rate
dropped
important
funds,
sytem
_2.2 Billion
as a whole
in 1974,
in 1976.
Supertichoso
effect
in the purchases
institutions.
We may argue
argued
received
_6.2 Billion that this
of government
off-hand
larze
inflows
in 1975_
large
inflow
securities
that the decision
of
and _5.8 had a
by financial
to buy government
116
securities yield
was only partly
on alternative
Households_ assets.
determined
assets
has To be considered
on the other hand,
Their security
_1.8 million
moved
holdings
and detailed
-
as financial.
as well
an invaluable
contribution
distributional
Surprisingly_
aspects
in 1974 to
were based
between
this weakness,
this rich
sectors
the NCSO made
set of data.
of asset
and saving
Livestock
families
borrow
They are
their
declining
loan/deposit
The authors
(in deposits)
Rural
a large
This differs
for the who!ePhilippines.
assets,
it is not certain
had low and
interpreted
from rural
classes.
of farm
per year.
banks
table
predominated
Dissaving
FI,500
banks.
funds were drawn
is their
did not constitute
got funds from rural
into the
rate by income
income groups
to increase
ratio.
below
small.
groups below higher
looked
and equipment
assets were relatively
among much
TBAC-BRF
Reproduced
that they
that
from _6 million
oÂŁ the flows
Despite
of saving.
occur I for income
rural
analysis
to produce
of total assets.
from the dissaving While
for assets.
to physical
on the flow of savings
land and its improvements
while financial families
then dropped
now to the farm sector
the distribution
proportion
in any demand
to future researchers.
Turning
giving
Relative
away from Securities
conclusions
on a not so careful
a challenge
of funds.
in 1976.
Supertichoso's
spending
by supply
banks
this tO mean to other
users,
,_
_.
_0
0 0
0
q-.l
0 •,+I +_ •,4
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•
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<74 0,I
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+.,'+°
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m =I m_
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4-_ =p
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ill.
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_+-I rH _?,i t_ _0 _-- C_ O_ v _++
---,-I
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.. .,,"1 _;_.,".1_!".._...0 :.,I.+P • ,_. Hi q'J _.-+
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l
;..; ..' ;._._., _. +O _ "
m
•-,+i _...._ 4+ _'_ "_ _
l
I0 H '+'+-,+, _1_-4 =+,-, _'I +-.__
•
m 4J CT_ m ",,'_ ,:_' ,_, ',J <,
H
<.
,--,_ m'+-,'-',.+'+->.-.+ +
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_l
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l l_
_
0
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:..,.
I I ,
118
possibly
the urban sector.
Encarnaci6n
(1964) made
the same observation
earlier.
A lot more work The papers
on flow of funds
this joint decision been
can be done on savin_ and portfolio
of household
left for future work.
portfolio
behavior
agricultural
provided
and business
We know very
whether
from their urban
counterpart.
evidence
as to the effect
of interest
behavior.
We analyzed
unhampered
intermediation.
saving and portfolio
segmentation. financed
earlier
empirical What
included
families
There
as _ joint
differ
in this
is moreover,
implications
decision.
to models
reliance
on saving
economics.
no clear
in the bibliodraphy
on the
of having
of financial
said
an
of studying
The data should
on self-finance?
be
market Are self-
the less profitable?
are not directly
For
have
with uncertain
rate and intermediation
the small and/or
The other studies to the field of monetary
of families
the positive
support
determines
firms generally
but some questions
From this we see the importance
decisons
into
little of the saving and
and how these
behavior
able to provide
us with important'insights
of low income families,
income;
choice.
this reason
for use by future
relevant
they are merely
researchers..
119
Concluding
Remarks
The financial
unvaried
It took on a pattern
artificial
segmentation.
institutions
responded
market
Segmentation
to policy
of interest
There
Bank to the rapid
is informal
seoomnentation in this
observed.
smaller
rates
placement
These
of B200,000
deposits
consequence
and deposits.
the regulation
tend
liability
interest
is gotten
to
In 1_76,
and high yield
in furthe_
rate is currently
the regulation
pooling
of regula-
as a response
resulted
to be paid hi_her
artificial
of
was a response
of transactions
get around
by their
per cent tax on money market
growth
system
from the way financial
were also regulated
A two-tiered
Very large placements
ones.
loans
currency
and
showed evidence
for instance
on bank
evidence
market.
which
resulted
market
f_om a very small
a managed
and as a direct
rates and denomlnat_ons
of the Central
offered_
established
of development
The growth of the money
the _egulation
money
grew very rapidly
base when the Philippines
in 1948.
tions.
market
rates
than
on minimal
into trust
funds.
around by direct
The 35
borrowing
120
and lending
arranged
by the intermediary
the market
has been growing
depositors
and borrowers
A number regulating
rapidly,
innature
though
some
intermediation
evaluated
interest rates,,money of government
l_ile
this
among
segment small
market
securities. empirical
such policies,
especially
those
denominations,
discounting
and
These papers
support
were mainly
for the arguments
set of work
that provides
basis
deregulation
and f_eeing
market.
policy
There is strong
and discontinuance financial
toward argument
of the large
institutions
for deregulation
credit
incentives
expository
have been
In our view they form an adequate for changing
of
has slackened.
of papers
marketing
bank.
a strong of the
of interest given
given.
rates
to inefficient
such as some government-supported
banks
and to
!
the highly infant
successful
large
industry protection
/l<ely to make them more efficient
in lending
of generous have
similar
commercial, banks. given
competitive
them.
Deregulation
privileges
results.
It will also
and lenders
of extensive
the issue of freeing
to private
the market,
there
of the banks
is
and more
rat_s
and granting
coramercial banks
tend to prevent
arguments
control,
funds
of interest
as is p_aetieed
In spite of the strong system
and development
in attracting
discounting
among borrowers
present
to _ura!
The removal
price
would
discrimination
now.
brought seems
The monetary
out against
the
to be no consensus
authority
about
has increasingly
121
become
oriented
tions
from
banking can
the
obtain
institutions,
say are
is probably
for
and
monetary
authority
It
imposes
without as
joined
We
_refer
the
1976 very
immediately
the
that
the
be
able
are or
50s.
_uo.
of
system
to
_nitiate control be
the
argued
_the yield
As
of
one
not
changes.
It
been that
the
inte_nediation. one
viewed
substitutes.
does
thrift
has
market
whether
they
as
that
small
the
wa_
as well
financial of
is to
In this
the
of
of regulaIt
or
it might
claims,
gmowth
private
system
time
the
financial
, part
transactors, supply
from
view
financial
of
market
the
_
r'apid
status
the
to
same
each
the
equity
a segmented
the
regime
of
a zroup
the
as
at
a time
assets
or
substitutes_ instrument
rest.
foreign
to have
At
on
affecting
the
small
and
by
funds
segment
bond
that
by
market
preserve
reasons
has
considering
Given
with
too
regulations
regulations
recent
the
expanded.
liabilities
affect
The
these
retained
to
shown
subsidized
sources.
subsidy_
as
free
interest
to
inflationary
control
relatively
system's
continue
obtain
toward
this
institutional
missions the
that
World
Bank
significant enacted
recommendations
for
have
band-wagon
in particular
to
Country
of the
policy
been
1972
and
1977
The
Their
changes.
to
review
policy
and
private
IHF-CBP
1972
repomt A
orientation
central
recommendations
l_e.
and
invited
Philippine
Report.
policy into
climate
short
IMF-CDP man_
survey
came
of wh&ch
were
rationale
a total is
bankers.
teams
team
contains
seemed
Of
given
and out
99 for
(_)
each recommendation. more important
Here _e will
recommended
focus
changes,
on what
we consider
to be the
namely:
1. Expand the[coverage of CB re_Tulations to, all financial intermediaries While at the same time applying uniform regulations to each set of similar instruments, whether or not they are issued by banks or non-bank intermediaries. This allows the CB to apply to all financial intermediaries and instruments reserve requirements and interest rate ceiling. 2. authority claims.
The Usury the power
Law was repealed giving the monetary to set the interest rate ceiling on all
3. Ownership of banks is encouraged to be diffused. At the same time branch_ instead of unit banking, is encouraged. A supplementary regulation to achieve th_s objective is the requirement to increase banking equity. Diffusion of ownership is to be accomplished by prohibiting relatives up to fird degree of consanguinity to own more than 20 per cent of a bank equity. Preemptive rights over DBP contribution to rural han)_ capital is not to be given to _'affluent_' owne_,s of said banks.
Other recommendations from the executive borrowing
branch
of the government,
from CB, and new debt-equity
significance
to efficiency
Moreover_ success
such as greater
the survey
competing
schedule
of time
deposit
deposits
to no cefling
for CB
ne_ limit to government are deemed
of less
of intermediation.
of the money market
to lon_r-t_rm
ratios
independence
team recommended
in drawing
funds,
instruments. rates
it should give
of the incentives
Thus the CB came up with a new
starting
for mo_e than
that because
from 7.5 per centfor
two-year
maturity.
60-day
time
It is difficult
to
123
expect
the long-term
market
can be developed
by regulations,
and of the
type used here.
The repeal ment,
It should
of the Usury
Law was a very
allow for a note rational
The recent
interest
relaxation
of the structu3_e of rates.
raised
rather
_egulations
substantially.
were
however
question
whether
day maturity risk
deposit the
i/2 percentage
in this lengthening
We cannot
fop the CB to treat money or riskiness market
uniformly.
Jnstrument_
be treated
uniform
rates
became
wide.
recommendations
on money
for 60-
fop the illiquldity stipulating
and
these
chosen.
of the survey
of similar
or a deposit
deposit. market
the
is the
ziven
nature
In the same vein it is not clear
from a regular
were
Moreover,
the recommendation
check
and maturity
why a money
substitute
It seems
team
should
inconsistent
is made together
with this on
treatment.
The literature financial
institutions.
is unsettled
The debate
which they argue that non-bank
about
originated
financial
a
more
There
The circulars
instruments
say a post-dated
differently
zhat special
market
nominal
differential
for the mates
with
but a move toward
of rates
compensates
of the asset.
disagree
rate.
anything
remained rate
adequately
rates did not give a rationale
on interest
of the instrument.
and loan rates
differential
achieve-
The average
The structure
rigid as it was tied to the maturity margi n between
policy
important
the need with
to regulate
Gurley
intermediaries
all
and Shaw in
are also able
124
to increase
the level of credit beyond
this reason they economists financial
should be regulated
respond
Policy
on others.
control
segment
to the principal
It is felt that this debate of the recommendation
additional
regulations
added additional artificial
is not very
widespread
complexity
system
especially
market
banks and investment
of oligOpolies. three years.
A substantial The pattern
a large domestic
which
in the long-run
known that the financial
the Central In fact the
of this recommendation
and possibly
to more
a policy Financial
under a relatively
opposite
serious
is that on merger.
It is well
includes
horizontally
integmated
houses.
Merger
encourage
number
of merging
bank to merge
may h_ve very
with
of banks
would merged
is for a large smaller
ones_ J
India).
banks.
The significance
of control.
to intermediation
assets
commercial
it encourages
of
segmentation.
implications
following
OTher
to limit
to us_
as a consequence
The third recommendation
commercial
i.e.,
important
For
substitutability
Thus it is sufficient
of the market,
that ensued
banks.
one form of financial
of the IMF is that
its already
liabilities.
the strong
affecting
would have repercussions
deposit
like commercial
to this by pointingto
instruments.
Bank to expand
their
that of anti-trust
for_nation
in the last two or
foreign
bank
or
We are thus
/
in other
oligopolies
will not have as serious
free market
system.
countries
(U.S.,
implications
In the case where
the government
125
grants
substantial/credit
the
imperfections
The
full
expected
in the of
that
have
it will and
This
formation
and
has
will
favor
expand
faster
as
included
several
on
contradicted inflation
to be
placed
the
each
back
to
works
not
be
other
regulations,
seriously
analyzed impact
exacerbated.
here on
but
the
it
can
be
efficiency
The
results
This
tested.
taking
account
of
the
should
attempt
at
obtaining
Models
of
supply
v_riables
lags
relationship
More to
It
a more
have
and
to
the
likely
bigger
banks.
toward
of
for
rigor
has
been
not
the to
model worked
trend
that
will
hasten.
papers
function
and
but
and
in model of
Future
the
inflation
sometimes
supply
needed
building hypotheses
econometric
work
measure
of
interest
conduct
of
quantitative
be
to
identify
able
co?rectly. out
oligopoly
latter
recent
money
of
universal
If the
specifications
tools the
more
the
setting.
specify
upward
supported_
seems
accurate
is universal
oligopoly
supply
sometimss
consider
control
the
on money
true
of the
is not
t_end
correct
institutional
monetary
explanatory
was
contemplated
context
literature,
a few
_ttention
in the
the -
other.
hypotheses
selective
to
currently the
the
parZicular
as
in
a consequence,
paying
well
is
of regulations.
saving.
money
that
than
empirical
is
extensive
negative
smaller
Turning
likely
policy
serious
policy
system
banking
this
are
have
equity.
A related banking.
and
market
implications
intermediation
and
subsidy
rates. as
relevant
Appmopriate
in past
works.
There
126
is need to correct
for this.
It is also hoped
that
larger models
will
be built in the future.
There is no literature interest
rate.
sources.
The information
These were
World Bank Country activities,
etc.
papers
Report
provided
dealing
studies
The rates
is discernible.
addressed
and those determined
higher째
These data give us neither
adequate
time series.
Basic among these Except
for Clemente_s
This topic
begs maiy
estimates
sources.
were not even consistent
A second basic
rate
Clemente_s
nor an
questions.
interest
It is to be noted
question
_ere very much
structure
the information
by the World
market
forms were oftentimes
researchable
of the
with each other.
from those reported
money
in the market
complete
such as the
and no matu_i_:y pat%_x_
savings
freely
of
disparate
topics
to farmers,
very widely
and the NEC data_
here was from secondary
differed
more
is providing
with different
on popular
negative
to the stmueture
came from rather
on credit
differed
The real rates
directly
rate structure.
on rates
reported
that some of the data money
market
rates
Bank.
is how the regulated
and unregulated /
rates interact demand
with
each other.
for asset functions.
results reliable
are not conclusive. information
to find the interest
There
These
still
were a few attempts lack rigor.
But we cannot
on interest elasticity
rate
have
of portfolio
The empirical
conclusive
is available. demand
to develop
results
It will
unless
be important
by savers of
127
different study.
characteristics.
We have_ howeverg
-_/962-65 and the NCSO
Flow of funds mostly
197_-76
recent NCSO work become
sporadic
statistics.
a continuing
data will be useful series_
such as the Hooley-Moreno
It may be suggested
regular
for this
annual
that the
effort at obtaining
flow of funds.
A distribution flow
of saving using
movement
study
existing
of funds f_om rural
to the saving-portfolio
similar
to that done by TBAC-BRF
data may be feasible. to urban areas
decisions
It should
and should
of rural
on its
show the
also give light
and urban households
and
firms.
No work
has been
cost borne by different
done on Credit
types
allocation
of borrowers
and the finance
in the financial
Such work should be integrated
with the cost of finance
of financing
that have no access
market.
of spending
These studies
would
tion and its implications question
Of the relative
Are the transaction through
financing
costs
Reserve
help us understand
on efficiency
of borrowing
the extent of segmenta-
through
through
and means
to the institutionalized
and equity.
cost of financing
intermediary
There has been intermediaries.
units
market.
There equity
these
is the related and bond
issues
higher
issUe_ rhan
loans?
no work and other
on portfolio portfolio
behavior selection
of financial may be researched
128
by
itself or as part of a money
rigOrOUS banks
fashion
observed
and non-bank
is intrigued
Patrick
segments.
apparent munber
success
There
is the money
of a few large
A related
dynamism
of the market
growth
observation
as to what the allocative
in the Philippine degree
con%ext.
of imperfections
conditions
it will tend to result
papers
of
financial
were addressed affairs
future will
take on the natume
conclusions
sound prescriptive.
is the of a
institutions
vertical
conglomerates.
efficiency;
of
the merging
integra-
The question
depending
under
on policy
issues
banking on the
Under
perfect
imperfect
facing
"This f0eus was inevitable
to policy
sector.
Notable
of a few merged
differ
to
in greater_nefficiency.
came to focus
of moneta_
of course.
and credit market.
to greater
system,
visitor
but especially
is the apparent
goods
it may give rite
This review
as a whole
The answer will
in both
a recent
impact may be of conglomerate
conditions
Philippine
in a
and liabilities
He also notes
tion of some of large finance-industrial arises
explain
of the financial
market
banks.
of them and thephenomenal
such as PIS0,
of assets
of Yale University,
by the extreme
He notes very rapid growth certain
composition
It should
institutions.
Professor Manila
supply model.
with
by the Central
a numb_
Bank.
being
It is hoped
of positiveeconomlcs. We apologize
the
a many o{_he
critical
of the co_d_d_
that research
in the
We are aware
that our
we _me not able to changethem.
of
129
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