Market-Oriented Central Banking

Abstract

For effective monetary management in competitive economies, market-oriented central banking relies on financial markets rather than discretionary controls in adjusting overall liquidity to stabilize prices. Behind this reliance on money markets, however, is a stable long-run relationship between money and output as well as the interest rate. In an illustrative estimation of the demand for money in the Philippines covering the period 1950-1991, using the framework of an error-correction model, such a stable relationship is found after testing the relevant time series for trend and mean stationarity. It is inferred from this that monetary programming on the basis of open market operations becomes a meaningful endeavor.