How Do Central Banks Control Money

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We know that central banks watch certain indicators in order to decide on its monetary policy, but they can do this in a number of ways. That I will be sharing here with you. This will be quite brief, but it will give you an idea of what things you can look out for, as an indication of what the central bank is doing.

Firstly the central banks can control the size and growth of money by setting a reserve asset ratio. This affects the multiples that the banks are able to lend against.  Which in turns limits and controls the amount of liquid funds that are able to be circulated in the market.

Secondly they can also do so through open market operations such as the buying and selling of government debts, eg repos. This involves the government directly interacting with the market

Thirdly, they can influence money supply by adjusting interest rates. They can do this by changing the discount rate and impose fixed rates. Since banks and consumers are all sensitive to interest rate changes, the way we use money and whether we rather keep them as deposits will change.

Fourthly would be through credit control. In this way, the central bank places limits on the bank lending or on consumer borrowing.

Lastly would be through moral suasion, which basically involves the central bank trying to persude banks to tighten their lending.