Understanding Monetary Policy

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It has being argued that in any operating system, there must have been some beneath subsystems. Considering the operation of motor engines for instance, which serve as the ultimate subsystems controlling not only the affairs but also the effective movement of any motor vehicle, such is the way the central bank’s

established monetary policy turns the wheel of an economy system toward the growth and development of the nation.

 

 

Monetary policy like any other policies might be naturally invisible but, it’s the policy by which the government and monetary authority (central bank of Nigeria) control the supply of money, availability of money and interest rate in order to attain an established economic objective towards the effective growth and development.

 

Besides, money after the abolishment of trade by batter has served as the modern medium of exchange between individuals both locally and internationally. In this case, one can comfortably maintain that without money access to goods and services is not possible.

 

As money became the only medium of exchange used by heterogeneous population around the world, for an economy system to achieve timely growth and development, there is the need to put in place an effective and well defined policy that would regulate money circulation if an economy system wants to survive.

 

The injection and withdrawal of money to and from the economy would be needed to be controlled so as to avoid an unwanted strained development that could cripple the economy such as high inflation rate as it did occur in Germany in 1920s, United State and France in the late 1700s, USSR and Austral after World War l, Hungary, China and Greece after World War ll.    

 

Inflation has been regarded as a general increase in price level of goods and services. Continues injection of money into circulation more than the system requires can lead to devastation on the economy. On the other hand, the raise in withdrawal of money from the circulation could result to deflation.

 

Subject to these stunt situations, the central bank as monetary authority has been entrusted and mandated to adequately and timely monitor the nation’s monetary affairs.

 

Monetary policy according to Reynolds (1985), aims to achieve such developmental issues such as economic growth, inflation control, effectiveness in currency exchange rate and unemployment eradication. To achieve these proposed targets, the monetary authority adopts some tactful tools and policies. Some of the policies can be restrictive or expansionist.

 

As Skidelsky (1996) noted that an excess of planned saving over planned investment sets up restrictive force; an excess of planned investment over planned saving set up expansionist ones.

 

Restrictive policy is adopted by monetary authority to reduce the level of money supply when there is  high money in circulation that could pose future inflation and grossly devastate the economy. This is achieved according to Anyanwuocha (2001) through some monetary instruments such as Open Market Operation ( i.e. buying and selling of government securities, such as treasure bill and bonds from the public and business organizations; bank rate, the at which central bank lend money to the commercial banks and other financial institution; cash deposit ratio, the minimum legal reserve required of the commercial banks; special deposits, the additional required special deposits from the commercial banks by the central banks; among others.

 

In a situation where by the central bank wants to inject money into circulation so as to oil the instant needs for investment activities and avoid high deflationary situation, the expansionist policy is adopted to perform such function. This could also be achieved by using the primary monetary tool, Open Market Operation. Open Market Operation according to Reynolds (1985) is the day to day monetary tool for the purchase and sale of federal securities with a view to raising or lowering bank reserve.

 

However, the expansionist and restrictive policies may fail if credibility and fairness is not fail is not adopted in central bank operation. That is, if the policies do not consider the economy private agents such as business organizations, investors, among others who would have predicted such introduced policies as anticipation to high inflation.

 

In this case, to avoid these` strained and agitated situations, central banks as an independent body should  exercise conscious in its communication and implementation of its policies so as to sustain its credibility and integrity in the system

 

Abubakar Jimoh

University of Abuja

[email protected]

 

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