Instruments of credit control, Managerial Economics


The central bank employs several instruments to control aggregate credit in the country. While some instruments like the open market operations minimum legal cash reserves ratio and the bank rate policy are indirect and traditional ,other like the rationing of credit and direct credit control are new having been evolved recently. According to De Kock . the following are the nine principal instruments which are generally employed by central bank to control credit in the economy.

1. The lowering on raising of the discount and interest rate with a view to lowering or raising money rates generally and encouraging the expansion or contraction of credit.

2. The buying or selling of securities or bills of exchange in the open market with a view to putting additional funds into the market or withdrawing funds there from and thus expanding or contracting credit.

3. The relationing of credit as an alternative or addition to raising discount interest rates.

4. The taking of direct action either in the form coercive measured against any offending bank or other financial institution or in the form of directives issued to banks generally concerning their lending and investment operations, in order to assist the central bank in controlling the quantity of credit as well as securing a better qualitative distribution of credit.

5. The lowering or raising of the minimum cash reserves to be maintained by the commercial banks as an additional means of enabling the central bank to expand or contract their capacity to create credit.

6. The imposition of minimum secondary reserves requirements to maintained by the commercial banks in the form of government securities and other specified assets in order to restrict their capacity to extend credit for general business purposes.

7. The regulation of the terms and conditions under which credit repayable in instalments may be granted for purchasing or carrying consumers durable goods as a means of exercising some direct control over the volume of outstanding consumer credit.

8. The regulation of margin requirements in connection with purchases of stock exchange securities, as an instrument for exercising some direct control over the volume of credit used in the security markets and .

9. The use of moral suasion and publicity to achieve the desired objectives

10. These instruments may now be studied in greater detail.

Posted Date: 12/1/2012 7:02:17 AM | Location : United States

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