Frequently Asked Questions
| Can the Federal Government frustrate the Central Bank from pursuing its monetary policy? | |
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Yes, when the Federal government exceeds its revenue the CBN finance government deficit through Ways and Means Advances subject (in some cases) to the limits set existing regulations, which are sometimes disregarded by the Federal Government. The direct consequence of Central Banks financing of deficits are distortions or surges in monetary base leading to adverse effect on domestic prices and exchange rates i.e macroeconomic instability because of excess liquidity that has been injected into the economy. |
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| Does National Central Banks have sovereignty in the Monetary Union? | |
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The National Central Banks lose their sovereignty and have no power to conduct individual monetary policy for their countries but become branches of the common central bank. |
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| How do Central Banks Tackle the Problem of Uncertainty in the Conduct of Monetary Policy? | |
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To mitigate the problems of uncertainty in the conduct of monetary policy, central banks seek ways to obtain a better knowledge of the structure and functioning of the macro-economy as well as the transmission mechanism of monetary policy. The credibility of the Central Bank is also an important factor in ensuring the efficient conduct of monetary policy, especially under conditions of uncertainty. Central Banks can also design robust policies that can perform well on average across all the available fully specified models rather than to reign supreme in any particular model, in order to mitigate the problem of model uncertainty. |
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| How does e-money affect the efficacy of Central Bank’s monetary policy? | |
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The introduction of e-money poses a challenge to Central Bank’s ability to control interest rate as well as increase endogenous financial instability. The challenge to interest rate control stems from the possibility that e-money may diminish the financial system’s demand for Central Bank’s liabilities thereby rendering Central Bank unable to conduct meaningful open market operations, while increased financial instability could emerge from the increased elasticity of private money production and from periodic runs out of e-money into Central Bank money that generate liquidity crises. |
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| What are the Forms of Uncertainty in Monetary Policy? | |
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Uncertainty in monetary policy include data, parameter and model uncertainties. Data uncertainty refers to the un-timeliness and inaccuracy of data used in economic and monetary analysis; Parameter uncertainty refers to the uncertainty that relates to the ultimate value(s) obtained in estimating econometric model parameters for a better understanding of the economy;, while model uncertainty relates to the choice policy makers have to make between several models at their disposal (reflecting competing economic theories) in trying to explain interrelationships at work in the real economy. Others include lack of knowledge about unforeseen shocks that would dislodge policy makers’ assumptions on the future path of the economy, such as oil price shocks, the complexity of the economy and the pervasive character of economic change. |
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| What are the goals of Monetary Policy? | |
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The ultimate goals of monetary policy are basically to control inflation, maintain a healthy balance of payment position in order to safeguard the external value of national currency and promote adequate and sustainable level of economic growth and development. These goals are achieved by controlling money supply in order to enhance price stability (low and stable inflation) and economic growth. |
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| What are the prerequisites for successful monetary policy? | |
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A successful monetary policy is a function of certain fundamental imperatives. Among others, relevant legal and regulatory framework, deep and broad financial market, good understanding of monetary transmission lag, and availability of timely and accurate data and information for the monetary authorities are crucial for successful monetary policy. |
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| What are the two major phases in the conduct of monetary policy in Nigeria? | |
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The two major phases are the period before the introduction of Structural Adjustment Programme (SAP) in 1986, and the period since the introduction of SAP. In the first period, the CBN’s monetary policy framework placed emphasis on direct monetary policy control, while in the second period it relied, and is still relying, on indirect approach anchored on the use of market instruments in monetary management. |
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| What is Balance Sheet Channel? | |
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This refers to the role of financial positions of private agents in the transmission mechanism. It shows how shifts in policy affect not only real economic aggregates but also, the financial positions of private economic agents. |
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| What is monetary policy? | |
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This concept defines any policy measure designed by the Government or Central Bank to control the cost, availability and supply of credit. |
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| What is the bank lending channel of monetary policy transmission? | |
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The bank lending channel represents the credit view of the monetary policy transmission mechanism. According to this view, monetary policy works by affecting bank assets (loans) as well as banks’ liabilities (deposits). The key point is that monetary policy besides shifting the supply of deposits also shifts the supply of bank loans. |
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| What is the Framework of Monetary Policy in Nigeria? | |
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The framework of formulating and implementing monetary policy in Nigeria has, overtime, witnessed tremendous transformation in line with the evolving financial environment. The major developments include the shift from direct control to market-based approach to monetary management, and the switch from short-term to medium-term framework in the conduct of monetary policy. |
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| What is the primary instrument of monetary policy under the market-based approach to monetary management? | |
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The Open Market Operations (OMO) is the primary instrument of monetary policy under the market-based approach to monetary management in Nigeria, but it is being complemented by reserve requirements, discount window operations, foreign exchange market intervention, and movement of public sector deposits in and out of the domestic money banks (DMBs). |
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| What is Transmission Mechanism? | |
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This concept defines the process or manner by which monetary policy measure(s) affects real economic aggregates like inflation, output, interest and exchange rates and employment. |
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| When and why did the CBN switch from short-term to medium-term framework in the conduct of monetary policy? | |
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The CBN has, since 2002, switched from a short-term (one-year) framework to a medium-term (two-year) framework in the conduct of monetary policy with the aim of freeing monetary policy from the problem of time inconsistency and minimizing over-reaction due to temporary shocks
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