<P> Since the shift to inflation targeting, BSP has already abandoned monetary aggregates because its information content has apparently declined in the recent years . Moreover, it is also assumed that a shift of approach was necessary because money aggregates are normally not good indicators of future economic policy requirements due to unreliability of measurement . </P> <P> Since inflation targeting leads to lower and stable inflation rates, more improvement should then be given to the measurement of the consumer price index since few percentage points have greater repercussions when rates are low . Errors in CPI measurement could lead to ineffective and unsuitable monetary policy response by the BSP which definitely result to detrimental effects to the economy . </P> <P> Another issue arising from monetary policies is the liquidity trap . This happens when inflation rate declines too much leading to a threat of deflation . Liquidity trap is defined as a situation in which there are zero nominal interest rates, persistent deflation and deflation expectations . In the event this occurs, bonds and money earn the same real rate of return thus making people indifferent to holding bonds or excess money . </P> <P> Given high budget deficits, the government is concerned about two closely related issues: it does not want to pay very high interest on its borrowings and it does not want to crowd out the market . Ideally, the government could raise tax revenues to avoid borrowing huge sums from the market . However, the government opted to borrow from the international capital market and though rates are low, these have shorter maturity and country's outstanding external debt has continued to move towards a less ideal position . </P>

Inflation targeting the bsp's approach to monetary policy