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 .
THE PLACE OF CENTRAL BANKS IN AN ECONOMY
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 .
THE MANDATES OF CENTRAL BANKS
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 .
PRICE STABILITY
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 .
THE PURSUIT OF PRICE STABILITY
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]
CENTRAL BANKING AND THE EVOLUTION OF
PRICE STABILITY AS CORE COMPETENCE
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
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