European Central Bank Monetary Policy

Executive Summary

This empirical research assignment regarding international finance on Monetary Policy in two foreign countries, one of which is Germany, considered as a developed country and the other is Nigeria, considered a developing country. Monetary Policy has been applied to many countries and in some cases regions to overcome similar challenges, notably to achieve and maintain price-level stability, full employment, and economic growth. In fact, such policy consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in an economy (McConnell, et al, 2012). Therefore, the purpose of this project was to analyze the data related to the aforementioned topic and report on the findings.

Before analyzing the details of monetary policy in the two countries, it’s necessary to explore and compare the institutional socio cultural environment of the Germany and Nigeria, including political and economic institutions that affect their stability and development. Perhaps the strongest economy of the Euro-zone, Germany’s monetary policy was handed over to the European Central Bank (ECB) since 1999 along with many other countries in the currency union. The Bundesbank (Germany’s central bank) monitors national monetary and financial indicators and implements ECB monetary policy. Since the establishment of the ECB, Germany can no longer decide its own monetary policy according to domestic economic needs.

Unlike Germany, Nigeria is responsible for its own monetary policy carried out by the Central Bank of Nigeria (CBN). While similarities to both systems relate to price-stabilization and economic growth, the means by which they are implemented could differ materially for reasons including the difference in the level of dependency of the two central banks, the state of financial literacy and the penetration of the banking system at the basic level of economic activities. Moreover, as a major producer of crude oil, the CNB faces a set of economic challenges in Nigeria that are quite different from the ECB in light of continued declining of oil prices around the globe. This is mainly because Nigeria is one of the major producers while the Eurozone is one of the major consumers.

For these and other reasons, it was concluded that both countries are at different stages of development and with that come different operating priorities. The continued decline of oil prices would likely result in further tightening of monetary policy to preserve macroeconomic stability. The result could be high interest rates and superior returns on investments in the money market, which could have negative impact on the stock market. Declining oil price scenario would reduce the accretion to reserves. Therefore, there is a good chance that the reserves will come under pressure. Besides, the customary disposition of the CBN to defend the naira through increased supply of foreign exchange will take its toll on the robustness of the external reserves.

Institutional Environment in Germany

Germany consists of 16 federal states, which is a part of the federal republic called Lander. They possess their own parliament and government along with their own constitutions. Alongside Lander there are the ten federal government ministries ranging from interior, defense, and health to education. Mentioning these various entities shows that Germany has a higher regard when it comes to their governance, and how their country operates financially.

Since Germany, among many other European countries is a part of the Euro monetary policy; the institutional framework of this single monetary policy’s main focus is to maintain price stability, and economic social growth. According to Bundesbank, “Disruptions to the financial system not only cause economic damage; they also prevent monetary policy from being implemented and can therefore jeopardize price stability.” (Deutsche Bundesbank, 2015)

In order for Germany to maintain its financial stability, the Bundesbank is a constant presence in all of the national and international institutions. By doing so, they remain abreast of the institutions current business situations and having the ability to monitor across the globe through modern technology. How the monetary policy is truly able to obtain this monitoring is through macro prudential supervision. This supervision is that of the banking supervision vision system where not only the banks are interconnected but other financial structures such as insurance and financial markets. (Deutsche Bundesbank, 2015)

What makes the Deutsche Bundesbank system so powerful is their dedication to stabilizing the financial market. They conduct a published financial stability review every year, which evaluates the German financial system. The review provides recommendations to policy makers and market participants an impetus for the continuous development of the monetary framework and the efficacy of the financial system. The committees present in this review are the Bank for International Settlements (BIS) and the Financial Stability Board (FSB). Also in attendance is the President of the Deutsche Bundesbank is the German Governor of the International Monetary Fund (IMF) and European Systemic Risk Board (ESRB). (Deutsche Bundesbank, 2015)

Below graph 1 shows the success of German monetary policy executed by the European Central bank.

Graph 2 failure of monetary policy in much of the rest of the Euro-zone without the German NGDP.

Institutional Environment in Nigeria

According to the World Economic Forum’s Global Competitiveness Report Nigeria ranked 127th out of 141 countries surveyed. The report indicated that the country was under duress when it came to undue influence, corruption, and government inefficiencies (Millman, 2013).

It’s not to say that Germany does not experience any sort of corruption however, their governance is strategic. The political parties are usually federalist and democratic but yet are under the control of state. Many of the bureaucracy within Nigeria are corrupt and known as para-statals. Para-statals in Nigeria provide input that has been gained from government that creates state-corporatism (Central Bank of Nigeria, 2015)

In Nigeria the Central Bank of Nigeria governs the monetary policy. The banks sole attainment is to facilitate price stability as well as supporting the Federal government’s economic policy. In order to sustain this stability, the CBN has implemented four committees: the Monetary Policy Committee (MPC), Monetary Policy Tech.