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This paper is based on my master’s thesis at the University of Delaware. I would like to thank Dr. Jeffrey Miller for steering my interest on this topic. I also thank him and Dr. James Butkiewicz for insightful comments on earlier drafts of the paper. Any remaining errors are author’s sole responsibility.
Selective credit controls encompass all instruments used by central banks to influence directly the flows of credit in the economy (Hodgman, 1972).
Throughout the text, all references to money and credit aggregates refer to their domestic currency components even when not explicitly specified.
To derive expression , we first take logs of both sides of equation  and apply a first-difference operator (ΔXt =Xt – Xt–1): ln(mt − 1) – ln(mt−1 − 1) ≡ [lnEAt – ln EAt] – [lnBt – lnBt–1]. We then approximate the terms in that equation with the following expressions:
(McCallum, 1989, p. 112). We then assume that the approximation errors are negligible, which can be assured by shortening the length of the time period to decrease the absolute value of the growth rates. This allows us to treat the result as equality, the left-hand side of which we can multiply by
To simplify the notation, we assume without loss of generality that the base period is the one preceding the period in which the credit ceilings apply.