http://unctad.org/en/Docs/osgdp20091_en.pdf CB

The first obstacle for developing countries in principle could lie in the way how base money is distributed from the central bank to commercial banks. For most developing countries, the technical process of money supply is quite different from that in developed countries: While most industrialized countries rely on indirect instruments such as open market operations to provide liquidity to the banking system, many developing countries lack deep financial markets to conduct open market operations in and hence have to rely on direct monetary policy tools such as bank-by-bank rediscount quotas or credit restrictions (Chandavarkar 1996: 3). However, closer examination shows that this structural difference might have less impact on the credit-investment process than one could think. While open market operation frees central banks from allocating reserves to different banks or regions by discretion and hence uses market forces to do so, there are little a priori reasons why the allocation of reserves by the fiat of the central bank should hamper the credit creation per se. Of course, the absence of a working money market will result in some loan demand with higher expected returns to the banking system being not satisfied. However, as the literature on adverse selection, moral hazard and asset price bubbles underlines, loans with a higher expected return are not always the most efficient from a macroeconomic perspective. Hence, a slight distortion in the allocation of reserves and credit might not be severe from a macroeconomic level. As long as credit or rediscount quotas are not misused to push the commercial banking system into loans which are not economically viable, but the indirect monetary policy instruments are used in good faith, they need not per se be an impediment to the creditcreation process. Hence, market imperfections in the money market do not plausibly pose a major obstacle for most developing countries to use the banking system to expand credit to its corporate sector. The second set of rest