This is in Response to the post someone created earlier tagged "Should CBN print more money to our dwinding economy". First of all, I will love to explain that CBN do not print money, it is the Nigeria security printing and Minting company Limited (NSPMC) that does, I hope that is clarified now. However, am not an economic but I will like to explain the effect of the question asked and how it works.

As a science student back then, we were told in economics that "Price rises when the government print too much money". In an economic term, excessive monetary growth will lead to inflation.

How?

Printing money and its effect on inflation is a bit more complex than it sounds. In fact, it is the Nigeria security printing and minting company that prints money, as I mentioned earlier, but it is the CBN that determines how much money is actually in circulation in the economy. Money printed by the NSPMC is distributed through the CBN to our commercial banks around the country. The government of which it is a part does not have any say on how much money actually gets injected into the economy, as monetary policy decisions are left up to the CBN.

Traditionally, the NSEC or fed security has one tool for injecting new money into the economy, a tool known as“open market operations”. To increase the nation’s money supply, the NSEC buys government bonds on the open market from commercial banks. Commercial banks then invest some of our savings into government bonds just like they invest some of our money into individuals and businesses by making loans and charging interest on those loans. Commercial banks will want to buy government bonds if the interest on them rises and will want to sell those bonds when the interest ratefalls. If the NSE want to increase the money supply to stimulate spending in the economy, it will announce an open market purchase of bonds. When the NSE buys bonds, the demand for bonds increases, raising their prices and lowering their effective interest rate. As the interest on government bonds falls as a result of the NSE open market operations, banks find them less desirable to hold onto as investments and therefore sell them to the CBN in exchange for, you guessed it, liquid money, fresh off the printing presses!

Remember, the money printed at the NSPMC and held at the CBN was NOT part of the money supply, since it is out of reach of private borrowers. But as soon as the CBN buys bonds with that money, it is deposited into commercial banks’excess reserves and is therefore now in the commercial banking system and therefore part of the money supply. So,“printing money”does not immediately increase the money supply since newly printed money only ends up in the CBN; only once the CBN has undertaken an expansionary monetary policy (an open market bond purchase) does the newly printed money enter the money supply.
Now, commercial banks have just sold their illiquid assets (government bonds) to the CBN in exchange for liquid money.

So the next question is, why does this lead to inflation?

Banks now hold more excess reserves, most of which are kept on reserve at their regional Federal Reserve bank. Reserves held at the Fed do NOT earn interest for the banks, and therefore actually lose value over time as inflation erodes the purchasing power of these idle reserves. Banks, of course, want to invest these reserves to earn interest beyond the rate of inflation and thereby create earn them revenue. In order to attract new borrowers, commercial banks, whose reserves have increased following the Fed’s bond purchase, must offer borrowers a lower interest rate. The increase in the supply of money leads to a decrease in the“price”of money, i.e. the interest rates banks charge borrowers.
So here we see why an increase in the money supply leads to lower interest rates. With greater excess reserves, banks must lower the rate they charge each other (the federal funds rate) and thus the prime rate they charge their most credit-worthy borrowers and all other interest rates in the economy, in order to attract new borrowers and get their idle reserves out there earning interest for the bank.
Lower interest rates create an incentive for firms to invest in newcapitalsince now more investment projects have an expected rate of return equal to or greater than the new lower interest rate. Additionally, the lower rates on savings discourages savings by households and thereby increases the level of household consumption. Households find it cheaper to borrow money to purchase durable goods like cars and it also becomes cheaper to buy new homes or undertake costly home improvements. So we begin to see investment and consumption rise across the economy as the increase in the money supply reduces borrowing costs and decreases the incentive to save. Aggregate demand has started to rise.
Additionally, the lower rate on government bonds resulting from the Fed’s open market purchase reduces the incentive for foreign investors to save their money in bonds and in banks, which are now offering lower interest rates. Increasing the money supply (not so much by printing money rather because of the“easy money”policy of the Fed), leads to increased consumption, investment, and net exports, and therefore aggregate demand in the economy. The rising demand among domestic consumers, foreign consumers, and domestic producers for the nation’s output puts upward pressure on prices as the nation’s producers find it hard to keep up with the rising demand. Once consumers start to see prices rising, inflationary expectations will further increase the incentive to buy more now and save less, leading to even more household consumption. Firms see price rises in the future and increase their investment now to meet the expected rises in demand tomorrow.

It does not take much for inflation to accelerate in such an environment. If the the government and the CBN do not slow down the increase in the money supply (STOP THE PRINTING PRESSES!) then soon enough workers will begin demanding higher wages and resource costs will start to increase in all sectors of the economy, causing the nation’s aggregate supply to decline as firms find it harder to cover their rising costs. Now we have both demand-pull AND cost push inflation! The weaker currency also makes imported raw materials more costly to firms, further adding to the inflationary environment.

Another Angle we should look at it!

It's not printing money per se that causes inflation

it's printing it in excess of the real value created by economy.
One way of looking at Money is that it's represents something of real value (food, clothing, services,...):
As new value is produced, an equivalent amount of money can be printed to represent it, thus maintaining a constant money/value ratio:
However, if money is printed without a corresponding value creation, the ratio of money to value must change - go up:
For example, If 100% of new money is printed while keeping value constant, all prices in the economy must double. Such increase is called inflation.
In theory inflation should not affect economy at all - it's a purely mathematical change of measurement units.


I expected a better explanation from my respected genius

Econs And Econometrics

Print more money does not cause inflation. Increase in salary, is what cause inflation

ademusiwa7:
Print more money does not cause inflation. Increase in salary, is what cause inflation

Don't confuse yourself bro, you saying the same thing. The two work together, one lead to another

hmmm

Printing more money will definitely cause inflation nd devaluation of naira.
I no do econs bt its obvious.




SARAKI is my ROLE MODEL