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