May 23, 2011


It is a common knowledge that an economy is the very survival of man and by sustainability is the capital arts of development  . It can  also be  mutually conceded that an economy matures at its own pace based on the development and  the structure of its financial system and market functioning efficiently with inherent macroeconomic stability prevailing at a given period .It is often well argued that a good lubrication of this system can never be possible without the efficiency at which capital is mobilized and optimized as a unit factor influencing  enhancement effect of  productivity growth .This cannot also be possible without institutional efficiency in addition to labour efficiency  .The role of finance and this framework is extremely important complex and irreplaceable  to facilitate and accelerate appropriate economic growth desired by economic agents and nations at large .The mobilization of these productivity factors in alignment to structural and regulatory  incentives forms a financial system as economy perpetually evolves and consequently can better serve the public mainly improving standard of living. That is why in  a sensitive clime intensive study is often extended  to  the financial and monetary system  which  is periodically  surveyed and appraised to determine its overall macroeconomic impact .

In 1961 the American financial system  was heavily surveyed according to Jacob, Farwell , and Neave [1972]whether ‘it was indeed serving the public as well as it might ‘ .According to the reports and findings of the Commission On Money And Credit it concluded that ;‘Our monetary ,credit ,and fiscal  policies and the instruments and institutions through  which they operate must be so designed that they can make essential contribution in the decades ahead  to the improvement of our standard of living through simultaneously achieving low levels of unemployment an adequate rate of economic growth and reasonable  price stability .And the more successful we are in achieving these goals the better able we will be to  achieve our most  fundamental growth ; to enhance the freedom and dignity of our citizens indeed of men everywhere and to ensure the survival of our country and  its system of government ‘.

These lofty objectives did work out today  in the U.S.By 1982 Geoffrey Whitehead  commented and quoting Professor Galbraith regarded American society as ‘ an affluent society’ .That ‘affluence is wealth and there can be little doubt that western civilization today is wealthier than any previous civilizations .We have more  material things more useful goods than any civilization before us’ ……Thirteen  years before the Commission enquiry the GNP was estimated to grow by   more than  50 percent  to reach  close to a trillion dollars in 1975 from the previous  figure of 600billion dollars annually in 1965.With productivity growing at astronomical proportion household wealth in the 80s towered above 10trillion dollars adjusted for inflation had grown over the period 1974 to 91  nearly 4 trillion dollars including financial assets and real estate rose from 3.75 times annual disposable income in  the former period to 4.5 times in 1991 .

The combination of housing boom of the 70s and the long economic expansion of the 80s in addition to low inflation and high real interest rates skyrocketed the historical boom in the value of household assets  . Today reflecting the vision of the Commission riding on the golden age of the  90s Capital market assets in the U.S. ballooned to 50 trillion dollars more than a third of the world .This indicates that strategic vision , national self critical appraisal ,robust policy , effective human capital deployment and most especially  the hands of providence  including the productivity factors noted usually  mobilize  a financial system into sustainable growth and development. Hence the robustness of this system determines the strategic outcome of such strategic vision of any nation which has carried the U. S. economy thus far with better economic sovereignty and better  standard of living at the top of the world .

At the centre of this argument or polemics is the prominence of financial institutions envisaged to play a vital role towards capital development of any nation  being regulated by CENTRAL BANKS worldwide . Evolution of central banking was bedrock to modern commercial banks and the latter also preceded it by cradle  .They are controlled by economic necessity and preoccupied with the religion of  regulation and control of monetary expansion and discretionary contraction  of money supply .
 Several school of thoughts have debated and disputed and supported the viability and expediency of central banks in an economy or a nation .Is a Central Bank necessary . Both the free banking and the Cartalists schools were at loggerheads with each other  in which the former asserted that a Central Bank was not necessary and also believed that the metallic content of money determines its  monetary value or the inherent  value of money  .Whereas the  Cartalists argued in its favor and supported the issue of legal tender currency  and that its management was equiproportional to national sovereignty in the long run .Some countries that established  central  Banks earlier in their history, like the Riks Bank of Sweden—the world first central bank came into operation in 1656 ,followed by the old Lady of Thread Needle street in 1694 and the bank of Canada in 1935 .

Some of these institutions did not start as  central banks but became central banks by accident or chance ;as they were formerly known as commercial banks , established by government as cheap sources of capital mainly in the period of war  so as to  protect national sovereignty which paid off  as the cartalists believed  and were also used as a leverage for maintaining price  stability by  restricting bank notes issue .Where they were not monopolies in the issue of bank notes and the last lender of resort functions were given special privileges and regarded as special institutions as long as they received operating charters from governments .By the dawn of 1900s only 18 central banks were found operating  world wide  as far as modern definition and modern use of the  term  Central Banking is concerned .The major obstacle here is that their obligation was  to provide cheap sources of finance at below market rates which in turn constrained its ability to maintain price stability as core objective in the long run .

To provide an enabling climate for the economy to grow Central Banks perform various functions and being saddled with diverse responsibilities today as the challenges grew in the system .Some of the functions include ;issuance of legal tender currency ,monetary control and Credit, external reserves and exchange rate management , settlement and payment system management ,financial system stability maintenance, and regulatory and Banking system surveillance activities .Other functions were derived from legal provisions and banking ordinances of respective countries .In the developing region they  ventured beyond traditional functions taking on responsibilities such as public debt management ,Capacity building and development activities and providing needed stability in the system .

Although a central bank still performs several roles like these such as employment creation  and ensuring safety in the financial system  its core mandate is still price stability. However the core mandates which tend to differ often indicate the idiosyncrasy of each region  and infact in some countries regulation and supervision of Banks [i.e. Bank of England ]and exchange rate management were excised from the confine of a central banks monetary authority .
Below let us take a look at the principal objectives of policy world concept; tenability and market relevance ;and strategic impact vs. sustainable economic growth .
The relative importance of price stability cannot overemphasized in a usual macroeconomic settings as a precondition for sustainable economic growth .It connotes a low inflation or zero inflation climate .While the opposite builds when general prices rise very rapidly and varies over time .It is a situation where the general level of prices rise very slowly or  does not grow at all. Inflation is the major determinant for price stability success or failure .A country with price stability has zero or low inflation .Inflation affects people with fixed incomes or fixed monetary value causes unfair distribution of incomes promotes uncertainty with dire consequences and discourages foreign investment .Moreover besides economic fundamentals such as exchange rate  money supply and productivity another factor that determines the level of a nation’s competitiveness which refers to national ability to compete in the international market is inflation which potentially erodes this competitiveness by discouraging both foreign and local meaningful investment It also has overriding influence on noted factors .Exchange rate instability excess money supply high wage structure against low productivity background is highly uncompetitive internationally .National competitiveness improvement is a progress in the relative share of economic profits measurable by investment and output expansion .The inability to spend more in Nigeria and spend more abroad for instance contracts demand for local goods and services increasing unemployment .This affects national productivity which is the output per man hour or an underlying measure in the growth of living standard .

This factor of inflation usually restrains or erodes this productivity and most importantly the national competitiveness vital to boost economic growth .For instance  a sudden rise in the Nigerian rate of inflation will discourage Americans from  demanding her local products due to expensive nature .This contracts foreign exchange inflow while the Americans products will be cheaper attracting more demand leading to capital flight crisis  and they can also import more cheaply from America  .Consequently leading to foreign exchange outflow from the country  . The combined effects of outflows and increase in imports leads to depreciating naira or exchange rate instability .All other things being equal when a country rate of inflation exceeds its trading patner her competitiveness declines automatically .

Also a period of higher outputs did translate into a period of low inflation .In the united states  the pre-1979 especially late 1940s ,50s 60s and 70s were a great period of high inflation –a major economic problem as  opposed to unemployment barrier of the depression .But relatively through better monetary policy had a relatively low inflation shortly thereafter using the policy to preempt rising inflation in contrast to earlier period in which the fed.  tended to wait for inflation to become a major problem before tightening .This happened in the 1960s and .70s. This delayed attitude needs more aggressive surge in short terms interest rates with inherent risks of recessions. Since then a more proactive measure had been put in place and the fed.  with consistent credibility  and appropriate  policy  taken to hold in inflation in check  .The low inflation and low short term interest credibility in the states had persisted   learning from the failure of past unsuccessful  policies .The lesson is that the policy tends to be effective when it preempt rising inflation as a guiding principle .

Therefore in the architecture of macroeconomic policy the central objective often remains the promotion and attainment of  domestic price and exchange rate stability which acts as catalyst for the attainment of sustainable economic growth and external sector viability . And more specifically the essence of stable macroeconomic environment is to catalyze economic output boosts employment generation and consequently impact heavily on quality of life index .However we need emphasize that  development oriented  macroeconomic policy shares the  following attributes and features such as low and manageable inflation rate, low interest rates ,favourable balance of  payment position exchange rate stability and sustainable fiscal performance .And most importantly the quality or state of  institutional development is also a major determinant of development oriented macroeconomic environment  in the economy at large

Although economic growth  is determined by a host of economic political institutional and social factors  which are uncontrollable and controllable monetary policy exogeneity  The core competence of monetary policy however is the pursuit of  price stability which upon attainment is a full indication  of macroeconomic stability and a reflection of growth oriented  macroeconomic environment . This is so because inflation  as usually observed according to Freidman   is a fundamental  economic problem . In the quantity theory of money he concluded ‘ inflation  is  everywhere  a  monetary phenomenon .That in the long run increase in the money supply leads to increase  in the price level ‘. This corroborated  Irvin Fisher ‘s way back  in 1922  which postulated that changes in the quantity  of money  have a dire impact on price level . And the main determinant  of  non inflationary economic growth  is the pursuit and  attainment of price stability which encompasses  all  main areas that apex banks can maneuver to attain macroeconomic stability in the long run. ..

The fact is clear ;the pursuit of price stability  is multidimensional and multi pronged approach implies indirect pursuit of all other economic objectives  which are price stability induced ;ensuring that money supply is at a level consistent with the absorptive capacity of the economy  safeguarding non inflationary growth as the ultimate institutional bias of  policy outcome  and monetary macroeconomics  [Sanusi;2002 ] That is why the paradigm shift in monetary policy objectives worldwide has come to favor it irrespective of multiple developmental objectives of central bank worldwide  [Uchendu,2001]

Over the last few  decades  an  increasing  body of literature have laid more emphasis on the depth of this objective   and adoption . As nations evolve through developmental phases  making more information and empirical studies  available  on how economies work .In  the early stages multiple  developmental objectives were  emphasized and pursued for monetary policy activity such as economic growth   employment generation and maintenance of stable prices safeguarding domestic currency external value and exchange rate stability  .Beginning from the 1990s  probably owing  to growing  waves  of  autonomy saddled with  increasing number of central banks  worldwide have come  to  adopt this  objective as a quintessential mandate for sustainable economic growth . For  instance according to Mahadera and Sterne [2000] and Uchendu [2001]   78 out  of 94 central Banks  or 83 percent of countries surveyed  focus on price stability as central  objective  and core competence for  monetary  policy
The studies exhumed that from the Bank of  Japan to  the Central Banks  of Peru  and  Mexico [Banco de  Mexico ] price stability remains a primary objective  . With  similar  legislation  adopted   by central Banks of  Israel England and South Africa have toed the same line  .The amendment to bank of Korea  act June 12 , 1950 empower the Bank to place more emphasis on this objective as core competence . Moreover  according to the statutory objective of European central Bank  as  stipulated in the Article 105 .1 of Maastricht  Treaty and its protocols which envisaged  the formation of  European central  bank  for the European Union and the European System  of   national central Banks [ESCB] were motivated and mandated  to  focus on price stabilility.  as  primary objective .The treaty specifically states that ‘ the primary objective of ESCB shall be  to maintain price stability ‘ and ‘ shall support general economic policy in the community with a view to contribute to the achievement of the community as a laid down in Articles 22 ‘

Contrary to the above overwhelming support for price stability across the world the United States still uses monetary policy ‘multipurposely ‘ The main objective of the U.S. F.E.D. monetary policy is to ‘maintain long run growth of money  and credit aggregates commensurate  with the economy ‘s long run potential  to increase production so as to promote effectively the goals of maximum employment stable prices and long term interest rates