The monetarist believe in supremacy of money i.e. money answers all things and that money is the only regulatory instrument in any economy and it is also the believe of the monetarist that an increase in money supply will lead to an increase in national income or GNP i.e. when money supply is increased in an economy it decomposes itself as an increase to cash balances in/on various individuals, people then hold excess of liquidity.
Central Bank and Monetary Policy
The Central Bank is the apex financial institution saddled with conventional and developmental functions, while it also regulates the activities of all other financial institutions. In Nigeria the autonomy of the bank was legally established in Central Bank of Nigeria (CBN) decree No 24 and Bank and Other Financial Institution (BOFI) decree
25 of 1991 to have or revoke licenses of financial institutions and also initiate money and credit guidelines . independent of government control.
Functions of The Central Bank
The functions of Central Banks can be divided into Traditional and Development functions:
Traditional Functions
These functions arose from the statute creating the bank i.e. the enabling act of the Central Bank of different countries. It needs to be emphasized that the traditional functions also have developmental implications hence the TRADITIONAL and developmental functions overlap.
The traditional functions are:
Banking Functions
a. Keeps the government banking account
b. Lends money to the government
c. Acts as a bankers’ bank i.e. banker to other financial institutions and
d. Serves as a clearing house for commercial banks.
Agency Functions
a. Provides exchange medium i.e. notes and coins on behalf of the government
b. Acts as registrar of government companies and corporations
c. Manages the underwriting, issue, sale and liquidations of government debt instruments like treasury bills, loan stock, e.t.c
d. Administers the country’s foreign exchange reserves, issues foreign exchange regulations and maintains the international value of the currency;
e. Keeps the government’s gold reserve and maintains the Exchange Equalization Account;
f. Represents the country on international financial institutions like the World Bank, African Development Bank, International Monetary Fund, e.t.c and maintains a link with, and accounts of these bodies; and an
g. Manages the national debt.
Advisory Functions
a. It is the chief monetary adviser to the federal government
b. Undertakes research on the various facets of the economy and provides report to the government for necessary policy actions; and
c. Co-ordinates returns from financial institutions.
Regulatory Functions
a. Acts as the watch dog of the economy, regulates money supply, interest rater, and formulates necessary monetary policies in line with the dictate of the economy.
b. Maintains banks integrity through supervision of banks, banking examinations and invokes necessary sanctions to ensure conformity and high ethical standards.
c. Supervises the credibility of institutions entering the banking system.
Developmental Functions
These are functions to stimulate economic development:
a. Harnesses Funds for Economic Development
b. Encourages savings mobilization through encouragement of appropriate financial instruments and licensing of savings mobilizing institutions and sustaining the confidence and integrity of the financial system.
c. Introduces appropriate long term instruments for transferring funds from deficit sector to the government for long term national economic development e.g. development loan stock.
d. Involves directly in development loan sticks and acts as the underwriter of government securities.
e. Maintains as much as possible, the stability of the value of the local currency and ensures easy convertibility and International reputation of the domestic currency.
f. Makes funds available to other financial institutions directly for on-lending to their customers for developmental purposes e.g. the Export Stimulation Loan.
g. Sponsors or at times Co-sponsor relevant financial institutions like the NIDB, the National Bank for Commerce and Industrial and Nigeria Stock Exchange which are major institutions in the capital market.
h. Guarantees credit to encourage lending to strategic sectors e.g;
The Agricultural Money and Capital market Development
a. Monitors the money market and provides facilities for the development of the financial system.
b. Promotes the level of banking habit generally through enlightenment activities especially via the rural banking scheme.
Allocation of Developmental Resources
a. Identifies the critical sectors of the economy which can act as prime-movers for development and ensures the effective distribution of credit to those sectors.
b. Encourages and at times initiates conditions to encourage borrowing in the high priority sectors.
c. Ensures improvement in rural development through policies aimed at ensuring substantial investment in the rural areas.
Provision of Developmental information and Training
a. Provides development information and statistics on the various sectors of the economy.
b. Provides advice, backed by research, to the government on areas needing attention for overall economic development.
c. Evolves manpower development in the banking industry through establishment of appropriate institutions like Financial Institution Training Centre.
• The central bank of any nation is usually saddled with what functions?
Ans: Conventional and developmental functions
Monetary Policy
Monetary policy is essentially a programme of action undertaken by the monetary authorities, generally the central bank, to control and regulate the supply of money with the public and the flow of credit with a view to achieving predetermined macroeconomic goal.
Monetary policy is a major economic stabilization weapon which involves measures designed to regulate and control the volume, cost, availability and direction of money and credit in an economy to achieve some specified macroeconomic policy objectives.
It is a deliberate effort by the monetary authorities (the central . bank) to control the money supply and credit conditions for the purpose of achieving certain broad economic objectives. Monetary policies are usually administered by the Central Banks, in some cases with some degree of political/ government interference.
The scope of monetary policy spans the areas of economic transactions and macroeconomics variable that monetary authorities can influence and alter through the monetary . policy. The scope of monetary policy . depends, by and large, on two (2) factors.
i. The level of monetized economy and
ii. The level of development of the capital market
In a fully monetized economy, the scope of monetary policy encompasses the entire economic activities. In such an economy, transactions are carried out with money as a medium of exchange. In which case monetary policy works by changing the general production, price level.
It is therefore capable of affecting all economic activities consumption, and savings, Investment, foreign trade. The monetary policy can influence all major macro economic variables; the Gross domestic product, Savings and investment, employment, the general price level and foreign exchange.
The other contributory factor is the level of capital market development. . While the change in the supply of money affect the level of economic activities through the price level, the other instrument of monetary control work through capital market where the capital market is fairly developed. Monetary policy affects the level of economic activities through changes in the capital market.
Monetary policy is one of the available tools of macroeconomic policy in the pursuit of the macroeconomic objective outlined in an economy. Monetary policy is very important in the sense that it can perhaps go further than some other tools in helping to attain the overall policy goal but must it be supported . by other tools.
Objectives of Monetary Policy
The objective of monetary policy is to try to achieve the same objective goal as the macro-economic goals which can change from time to time depending on the economic fortunes of a particular country. Generally the objectives include:
a. Maintenance of relative stability in domestic prices
b. Attainment of a high rate of, or full, employment
c. Achievement of a high, rapid and sustainable economic growth
d. Maintenance of balance of payments equilibrium
e. Exchange rate stability.
• Is monetary policy objective the same as macroeconomic objective.
Ans: Yes, because monetary policy is a tool that is used to achieve them macroeconomic objective.
Instruments/Techniques of Monetary Policy
The instruments/techniques of monetary policy refer to the economic variables that the central bank can change at its discretion with a view of controlling and regulating the money supply and the availability of credit. These instruments are also called weapons of monetary control and Nuts and Bolts of monetary . policy.
Open Market Operation
This involves the discretionary power of the Central Bank to purchase or sell securities in the financial market in order to influence rate which ultimately will affect the money supply.
Reserve Requirement
This refers to the proportion of total deposit liabilities which commercial and merchant banks are expected to keep as cash in vault and depositors against unforeseen development in their operation. Reserve requirement are of 2 types cash ratio and liquidity ratio.
Discount rate/ Bank rate
This refers to the interest rate at which the Central Bank is prepared to lend to commercial and merchant banks in the performance of its function as a lender of last resort, this serves as the basis for other rates charged by banks and discount houses.
Special Deposit
Banks are sometimes called upon to open maintained separate account with Central Bank, and they are compelled to deposit varying amount in these account.
Selective Credit Control
This is in form of directive to the commercial and merchant banks about the size and composition of their credits e.g. The Central bank may require the commercial banks to give loans to a specific sector of the economy not to exceed a certain percentage and it can increase that of other sectors depending on the relevance and importance of such sectors to the development of the economy.
Moral Suasion
It is a process by which the monetary authority offers informally or indirect appeal to the banks by way of persuasion to adhere strictly to its monetary policy guideline.
Credit Ceiling: This involves the fixing of commercial and merchant banks total credit to domestic economy by the Central Bank.
• What are the policy tools of monetary policy?
Ans: Reserves, open market operation, bank, rates, etc.
Summary
Money is defined as anything which by law or custom is generally accepted in exchange of goods and services and for settlement of debt. Since the advent of money, the problems that are inherent in the trade by barter is solved. Money basically performs four functions; these are; medium of exchange, store of value, unit of account, and measure of deferred payment. Since then monetary policy has been put in place to control its value, cost, stock and availability of money in any economy. The basic tools of monetary policy are discount rate, reserve requirement, credit, special deposit open market operation, moral suasion.