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Abstract
In the early stages of economic development, central banks typically rely on direct instruments of monetary policy, notably credit controls and controls on interest rates. With these instruments, they attempt to control directly the balance sheets of commercial banks. When countries move to a market-based system, central banks rely on indirect instruments to influence the level of bank reserves through financial markets. The main indirect instruments are reserve requirements, lending facilities such as a rediscount facility or a Lombard facility, and open market operations. With indirect instruments, central banks influence the levels of bank reserves by buying and selling securities, particularly government or central bank securities. In the beginning stages, before financial markets are active and deep, it is generally necessary to rely on “open market–type” instruments, such as auctions of treasury bills. Later, when a secondary market develops, central banks can buy and sell securities either outright or through the use of repurchase (repo) and reverse repurchase (reverse repo) agreements.9
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