IMPLICATION OF NEW CBN ACT ON THE FORMULATION OF MONETARY POLICY


ABSTRACT

In line with the CBN Act, 2007, one of the principal functions of the Central Bank of Nigeria is to “ensure monetary and price stability”. In order to facilitate the attainment of the objective of price stability and to support the economic policy of the federal government, the act provides the constitution of a Monetary Policy Committee (MPC) which will comprise the governor as the chairman, 4 deputy governors two members of the board of directors of the
bank, three   members appointed by the president and 2 members appointed by the members appointed by the governor.
The implication for the formulation of monetary policy is that with the new mandate derived from the CBN act and the composition of the MPC monetary policy credibility of the   banks will be strengthened. This is because monetary policy   will now be conducted in a more open and forward looking way 

INTRODUCTION
Since 1959 , banks lent out close to the maximum allowed  for the  49 year period from  1959  until August  2008,  through the present (November  2009)
Thus, in the first period, commercial bank money was almost exactly central bank money times the multiplier but this relationship broke down from September 2008.
As a formula and legal quantity, the money multiplier is not controversial. It is simply the maximum that commercial banks are allowed to lend out. However, there are various heterodox theories concerning the mechanism of money creation in a fractional reserve banking system, and the implication for monetary policy.

CONCEPTUAL FRAMEWORK OF MONETARY POLICY.
Bank money/central bank money, based on the actual observe quantities of various empirical measures of money supply such as m2 [broad money], or it can be the theoretical “maximum commercial bank money/central bank money” ratio, defined as the reciprocal of the reserve ratio, 1/rr.  The multiplier in the first  (statistic) sense fluctuates continuously based on changes in commercial bank money and central bank money [though it is almost the theoretical multiplier], while the multiplier in the second [legal] sense depends only on the reserve ratio and thus does not change unless the law changes.
For purposes of monetary policy, what is of most interest is the predicted impact of changes in central bank money on commercial bank money, and in various models of monetary creation, the associated multiple (the ratio of these two changes) called the money multiplier (associated to that model). For example, if one assumes that people hold a constant fraction of deposits as cash one may add a “currency drawn “ variable (currency deposit ratio), obtain a multiplier of (1+CD)  /(RR+CD)
CONTACT US FOR THE FULL WORK: +2347030722911
Share on Google Plus

Declaimer - Unknown

The publications and/or documents on this website are provided for general information purposes only. Your use of any of these sample documents is subjected to your own decision NB: Join our Social Media Network on Google Plus | Facebook | Twitter | Linkedin

READ RECENT UPDATES HERE