What Are The Limitations Of Open Market Operation In Under Developed Countries?


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Nouman Umar answered
The open market operations suffer from the following institutions in the developing countries.

Money and capital market not developed: The money and capital market in the under developed countries is not organized and well developed. As such the policy of open market operations is not effective.

Excessive cash reserves: if the commercial banks have surplus reserves with them and they resort to easy lending policy, the sale of government securities may not have the desired effect or reducing the cash reserves of the commercial banks.

Attitude of people: if there is return of notes from circulation and hoards, the sale of securities may not be able to reduce the cash reserve of member banks. Similarly if there are withdrawals of notes for increased currency requirements or for hoarding then the purchase of securities may not increase the cash reserves of the banks.

Cash ratio: There is no strict enforcement of fixed ratio of cash to credit for the member banks. If the economic and political conditions are favorable the banks may expand credit by multiple with low cash reserves. In case the loan conditions are not favorable the banks may contract credit even though they have sufficient cash reserves with themselves.

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