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 

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.
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)

The   most popular instrument of monetary policy was the issuance of credit rationing guidelines, which primarily set the rates of change for the components and aggregate commercial bank loans and advances to the private sector. The sectoral allocation of bank credit in CBN guidelines was to stimulate the productive sectors and thereby stem inflationary pressures. The fixing of interest rates at relatively low levels was done mainly to promote investment and growth.
Occasionally, special deposits were imposed to reduce the amount of free reserves and credit creating capacity of the banks. Minimum case ratio were stipulated for the banks in the mid.  1970-s on the basis of their total deposit liabilities, but since such cash ratios were usually lower than those voluntarily maintained by the banks, they proved less effective as a restraint on their credit operations.
From the mid-1970s it became increasingly difficult to achieve the aims of monetary policy. Generally, monetary aggregates, government fiscal deficit, GDP growth rate, inflation rate and the balance of payments position moved in undesirable directions. Compliance by banks credit guidelines was   less than satisfactory. The major source of problems in monetary management were the nature of the monetary control framework the interest rate regime and the non-harmonization of fiscal and monetary polices. The monetary control framework, which relied heavily on credit ceilings and selective credit controls, increasingly failed to achieve the set monetary targets as their implementation became less effective with time. The rigidly controlled interest rate regime, especially the low levels of the various rates, encouraged monetary expansion without promoting the rapid growth of the money and capital markets. The low interest rates on government debt instruments did not sufficiently attract private sector savers and since the CBN was required by law to absorb the unsubscribe portion of government debt instruments, large amounts of high-powered money were usually injected into the economy. In the oil boom era, the rapid monetization of foreign exchange earnings resulted in large increases in government expenditure which substantially contribution to monetary instability. In the early 1980s, oil receipts were not adequate to meet increasing levels demands and since expenditures were not rationalized, government   resorted to borrowing from the central bank to finance huge deficits. This had adverse implications for monetary management.
The objectives of monetary policy since 1986 remained the same as in the earlier period, namely: the stimulation of output   and employment and the promotion of domestic and external stability. In line with the general philosophy of economic management under SAP, monetary policy was aimed at inducing the emergence of a market oriented financial system for effective mobilization of financial savings and efficient resources allocation. The main instrument of the market-based framework is the open market operations. This is complemented by reserve requirements and discount window operations. The adoption of a market based framework such as omo is an economic that had been under direct control for long, required substantial improvement in the macroeconomic, legal and regulatory environment.


In order to improve macroeconomic stability efforts were directed at the management of excess liquidity   thus a number of measures were introduced to reduce liquidity in the system.  These included the reduction in   the maximum ceiling on credit growth allowed for banks: The recall of the special deposits requirements against outstanding external payment arrears to CBN from banks, abolition of the use of foreign guarantees/currency deposits as collaterals for naira. Loans and the withdrawal of public sector deposits from banks to the CBN. Also effective August, 1990 the use of stabilization   securities for purposes of reducing the bulging size of excess liquidity in banks was re-introduced commercial banks cash reserve requirements were increased in 1989, 1990,1992, 1996 and 1999.
The rising level of fiscal deficits was identified as a major source   of macroeconomic instability. 
Consequently, government agreed not only to reduce the size of its deficits but also to synchronies fiscal and monetary policies. By way of inducing efficiency and encouraging a good measure of flexibility in banks credit operations, the regulatory environment has improved.


Areas of perceived disadvantages to merchant banks were harmonized in line with the need to create a conducive environment for their operations. The liquidity effect of large deficits financed mainly by the bank led to an acceleration of monetary and credit aggregate in 1998, relative to stipulated targets and the performance in the precede year. Out flow of funds through the CBN weekly   foreign exchange transaction at the Autonomous Foreign Exchange Market (AFEM) and, to a lesser extent, at open market operation (Omo) exerted some moderating effect.


Financial institutions under the supervisory purview of the CBN   are the deposit money banks the discount houses, primary mortgage institutions, community banks, finance companions bureaus –de-change   and development finance institutions.
The supervisory function of the CBN is structured into institutions. Banking supervision and other financial institutions. Banking   supervision department carries out the   supervision of banks and discount houses while the other and other non-bank financial institutions department supervises community banks and other non-bank financial institutions. The supervisory process involves both on site and off site arrangements.
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 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 governor
The implication for the formulation of monetary policy is that with the new mandate derived form CBN Act and the composition of the MPC; monetary policy credibility of the bank will be strengthened. This is because monetary policy will how be conducted in a more open and forward looking way
            Overtime, the CBN has recognized that achieving stable prices would require continuous resentment and evaluation of its monetary policy   implementation framework to enable it respond to the ever-changing economic and financial   environment. It is against this background that the bank introduced a new monetary policy framework that took effect on 11th December 2006. The ultimate goal of the new framework is to achieve a stable value of the domestic currency through stability in short –term interest rates around an “operating target”.  The interest rate,  “operating target” rate ie the  “monetary policy rate” (MPR) serves as an indicative rate for transaction in the inter –bank money market as well as other Deposited Money Banks (DMBs) Interest Rate
The main operating principle guiding the new policy is to control the supply of settlement balances of banks and motivate the banking system to target zero balances at the CBN, through an active inter-bank trading or transfer of balances at the CBN. This is warmed at engendering symmetric treatment of deficits and surpluses in the settlements account so that for any bank, the   cost of an overdraft at the central bank would be equal to the opportunity cost of holding a surplus with the bank.


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 bank will be strengthened. This is because monetary policy will now be conducted in a more open and forward looking way    


1.      Bank for International Settlements  - The Role of Central Bank  Money in Payment Systems (Pg 9)
2.      Mankiw, N Gregory (2001) Principles of Macro Economics 
3.      Follow-Up on Samuelson And Monetary Policy
4.      Krugman, Paul: Wells, Robin (2009) A Mainstream Introductory   Text In Macroeconomics 95th Ed )
5.      Mainsteream Intermediate Text In Macro Economics 
6.      Excresns Series, St Louis Fed
7.      Federal Reserve Education  - How Does The Federal Create Money
8.      Mankiw  2002
9.      Mankiw Money Supply And Money Demand  : A Model Of The Money Supply
10.     Krugman and Wells 2009
11.   Mankiw  - Money and Prices in the Long Run
12.  Krugman and Wells (2009), Money, Banking & Federal Reserve System: Reserves, Bank Deposits and Money 
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