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)
INSTRUMENT OF MONETARY POLICY AND
PERFORMANCE OF DEPOSIT MONEY BANKS IN NIGERIA
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.
POSITIVE
AND NEGATIVE
POSITIVE
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.
NEGATIVE ASPECT
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.
THEORETICAL FRAMEWORK
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.
CONCLUSION
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
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Mankiw, N Gregory
(2001) Principles of Macro Economics
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Follow-Up on
Samuelson And Monetary Policy
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Krugman, Paul:
Wells, Robin (2009) A Mainstream Introductory
Text In Macroeconomics 95th Ed )
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Mainsteream
Intermediate Text In Macro Economics
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Excresns Series,
St Louis Fed
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Federal Reserve
Education - How Does The Federal Create
Money
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Mankiw 2002
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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
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Reserve System: Reserves, Bank Deposits and Money