PROFESSOR JOSEPH AGHOLOR

Professor of International Finance

and Financial Institutions
AT THE OUTSET IN THE UNITED KINGDOM, THE
ROLE OF THE MONETARY POLICY WAS TO
RESTS WITH THE CENTRAL BANK AND THE
GOVERNMENT.

THE GOAL OF THE MONETARY POLICY WAS TO
KEEP THE INTEREST RATE LOW THROUGH
DIRECT CONTROLS AND OR MONETARY
EXPANSION.

GENERALLY, WHY THE CENTRAL BANK IS
ACTIVELY INVOLVED WITH THE CONTROL OF
MONETARY POLICY (THE TREASURY) HAS
GREAT INFLUENCE OVER THE WAY MONETARY
POLICY SHOULD BE CONDUCTED.

HOWEVER, THE INFLUENCE OF THE CENTRAL
BANKS AUTONOMY IN THE CONDUCT OF
MONETARY POLICY FOR PRICE STABILTY,
CANNOT BE OVER EMPHASISED
A KEY COMPONENT OF ECONOMIC
POLICY

IT RELATES TO OFFICIAL ACTIONS
TAKEN BY CENTRAL BANK TO CHANGE
MONETARY AND FINANCIAL
CONDITIONS

THE CONDITIONS MUST BE WITHIN
THE OPERATIONAL CONDITIONS IN
THE ECONOMY.
MONETARY POLICY CAN RELATE TO THE
ACHEIVEMENTS OF THE CENTRAL BANKS
OFFICIAL OBJECTIVES

NAMELY :
(i) LOWER INFLATION
(ii) ENHANCE MENT OF STEADY ECONOMIC
GROWTH
(iii) FOSTERING FINANCIAL AND MONETARY
EQUILIBRIUM IN THE BALANCE OF PAYMENTS
(iv) MAINTAINING SOUND ECONOMIC AND
EXCHANGE RATE STABILITY

(v) ENHANCE MENT OF ADEQUATE BANK
CREDITS AND RESERVES

(vi) FOSTERING THE EFFECTIVENESS OF
EXCHANGE RATES ARRANGEMENTS,
MONETARY POLICY FRAMEWORKS AND
CONTROLS

(vii) MONETARY POLICY PROVIDES A TOOL
FOR ADEQUATE AND SOUND
REGULATIONS OVER CAPITAL FLOWS

(viii) MONETARY POLICY CAN SERVE AS
MECHANISMS DESIGNED TO IMPLEMENT
GOVERNMENT FINANCIAL DECISIONS BY
CENTRAL BANKS TO ACHIEVE THE
NATIONAL AND WELL DEFINED
ECONOMIC GOALS
(ix) IN THE BALANCE, THE IMPACT ON
MONETARY POLICY ON AGGREGATE
DEMAND FOR GOODS AND SERVICES
DEPENDS ON THE RESPONSES OF THE
CONSUMERS AND PRODUCT USERS.

(x) IT ALSO RELATES TO INVESTORS TO
CHANGES IN THE MONETARY AND
FINANCIAL CONDITIONS OF THE
CENTRAL BANKS AND THEIR POLICY
ACTIONS

UNTIL RECENTLY, MONETARY POLICIES HAD
BEEN USED TO ACHIEVE MULTIPLE
OBJECTIVES.

THE MAIN USES OF THIS POLICY INCLUDE:
ECONOMIC GROWTH

POVERTY ALLEVIATION

AMELIORATION OF BUSINESS CYCLES
TO MAINTAIN AND ACHIEVE EFFECTIVE PRICE
STABILITY

IT ENSURES THE EXPANSION OF AN
AGGREGATE DEMAND DURING A RECESSION

AN EXPANSIONARY MONETARY POLICY CAN
HELP TOACHEIVE FULL EMPLOYMENT
ESPECIALLY IF THERE WERE NO LIQUIDITY
TRAP OR INVESTMENT PESSIMISM

MONETARY POLICY SERVES AS THE
ROLE FOR THE CREATION OF A
STABLE MACRO ECONOMIC
ENVIRONMENT

THIS CAN ARISE WHERE REAL
ECONOMIC FORCES OPERATE
MONETARY EXPANSION HAS A
LASTING EFFECT ON THE PRICE LEVEL,
NOT ON OUTPUT OR EMPLOYMENT

INFLATION IS COSTLY, BOTH IN TERMS
OF RESOURCE ALLOCATION AND
LONG TERM OUTPUT GROWTH.
MONETARY POLICY HAS A TRANSITORY
EFFECT ON A NUMBER OF REAL VARIABLES

MONETARY POLICY ALSO AFFECTS THE
INFLATION RATES WITH LAGS OF
UNCERTAIN DURATION.

THE IMPACT CAN BE OF VARIALBLE
STRENGTHS WHICH CAN UNDERMINE THE
CENTRAL BANKS ABILITY TO CONTROL
INFLATION ON A PERIOD BY PERIOD BASIS

THE ARGUMENTS FOR IMPLEMENTING
MONETARY POLICY

(a) TO CONTROL INFLATION

(i) IT MAKES MONETARY POLICY
TRANSPARENT AND CREDIBLE

(ii) ALLOWS THE CENTRAL BANK TO BE
INDEPENDENT, YET STILL ACCOUNTABLE


CENTRAL BANKS AND MONETARY POLICY
ARE ESSENTIAL MECHANISMS FOR GROWTH

(a) PRICE STABILITY AS THE SOLE OR
OVERRIDING OBJECTIVE OF MONETARY
POLICY

(b) MONETARY POLICY FOR TAMINING
BUSINESS CYCLES
PRICE STABILITY AS A MEANS OF A
HEALTHY ECONOMY
MONETARY POLICY SHOULD AVOID TIME
INCONSISTENCY

INCONSISTENCY IN MONETARY POLICY IS A
MAJOR PROBLEM THAT POLICY- MAKERS
GENERALLY FACE
HAVING DUAL GOALS INFLATION AND
FULL-EMPLOYMENT IN POLICY
FORMULATION AND IMPLEMENTATION ARE
ESSENTIAL PRIORITY PROGRAMMES OF THE
CENTRAL BANK
CHOICE OF MONETARY POLICY RULES

IT BRINGS PRICE STABILITY BY
IMPOSING CONTROL OVER MONETARY
AGGREGATE AND ITS GROWTH RATE

MONETARY POLICY SHOULD BE
FORWARD LOOKING, NOT TO WAIT
UNTIL INFLATION IS IMMINENT




MONETRAY POLICY RELATES TO THE SUPPLY
AND PRICE OF MONEY IN THE ECONOMY.
THE PRIMARY OBJECTIVE IS TO CONTROL
INFLATION. IF THE MONETARY POLICY IS
LOOSE, IT LEADS TO MORE BORROWING.
THIS COULD LEAD TO INFLATION AND
EXTERNAL DEFICIT. IF MONETARY POLICY IS
TIGHT, IT MAY SLOW DOWN DEMAND AND
OUTPUT COULD LEAD TO MORE JOB LOSSES

INCREASE IN INTEREST RATE DISCOURAGES
SPENDING. CONSUMERS COUL BE
ENCOURAGED TO SAVE WITH HIGH INTEREST
RATES. THERE WOULD BE RISES IN MORTGATE
REPAYMENTS. THE HIGHER COSTS OF
CREDITS COULD DETER BORROWERS. THE
CORPORATE INVESTMENTS WOULD DECLINE
AS WITH SMALL AND MEDIUM SIZED
INVESTMENTS. THE PUBLIC SECTOR COULD
BEGIN TO LOOSE CONFIDENCE IN THE
ECONOMY
INFLATION IS DEFINED AS PERSISTENT
INCREASE IN THE LEVEL OF PRICES.
INFLATION ARISES BY DEMAND- PULL,
COST INCREASES, EXPECTIONAL
CIRCUMSTANCES, DISRUPTION OF
BUSINESS PLANNING, REAL VALUE OF
SAVINGS IS REDUCED. HIGHER WAGE
DEMAND ON EMPLOYERS. OPERATIONS
AND PRICE MECHANISMS ARE DISTORED
AND COULD LEAD TO UNEMPLOYMENT.