ALTERNATIVE INSTRUMENTS TO CONTROL MONEY SUPPLY (To understand how the Alternative Instruments in Controlling Money Supply works)

Alternative instruments : (1) Repurchase Agreements (2) Reverse-Repurchase Agreements (3) Outright Contract (4) BSP Certificate of Indebtedness

(1) Repurchase Agreement Repurchase Agreement (Repo) is a form of short-term borrowing for dealers in government securities. The dealer sells the government securities to investors, usually on an overnight basis and buys them back the following day. For the party selling the security and agreeing to repurchase it in the future, it is a repurchase agreement (repo).

(2) Reverse Repurchase Agreements A reverse repurchase agreement is the purchase of securities with the agreement to sell them at the higher price at a specific future date. Reverse repurchase rates is the policy interest rate at which the BSP borrows from the banks with the government securities as collateral For the party on the other end of the transaction, buying the security and agreeing to sell in the future, it is reverse repurchase agreement.

IMPORTANCE OF REPO AND REVERSE-REPO REPO transaction expands the level of money supply as it increases the banks level of reserves. Reverse repo, the BSP acts as the seller of the government securities, thus, the bank's payment reduces its reserve account resulting in contraction in the system's money supply. For both repos, the BSP can only affect the level of money supply temporarily, given that the parties involved commit to reverse the transaction at an agreed future date. At present, the BSP enters into repo agreements for a minimum of one (1) day (overnight) for both repos and a maximum of 91 days and 364 days for repo and reverse repo agreements, respectively.

(3) OUTRIGHT CONTRACT An outright contract involves direct purchase or sale of government security by the BSP from or to the market. IMPORTANCE OF OUTRIGHT CONTRACT In a transaction, the parties do not commit to reverse the transaction in the future, instead they are creating a more permanent effect on the banking system's level of money supply.

(4) BSP CERTIFICATE OF INDEBTEDNESS Certificate of Indebtedbess is a note issued by a borrower evidencing his or her promise to pay a specified sum on the stated date. Evidence of Indebtedness is issued directly by the government or by its political subdivisions. The evindence of indebtedness is acquired under Section 91, Article V of RA 7653 (The New Central Bank Act) must be freely negotiable and regularly serviced and must be available to the general public through banking institutions and local government treasuries in denominations of a thousand pesos or more. Certificate of indebtedness is made in case of extraordinary movement in price levels.