Monetary policy is adopted by the central bank of country in order to control and regulate the money supply in the country so as to stabilize the economy. The main function of monetary authority is to control and regulate credit money. Bank credit forms the largest part of total money supply in order to control the money supply. It uses the following methods to control credit money in a country during the different phases of a cycle.

All commercial banks by law are required to deposit some part of their time liabilities i.e. current account deposits in the central bank. During the boom phases of a cycle the central bank raises the reserve ratio of the commercial bank and hence allows less amount of cash at the commercial banks disposal and these banks are therefore forced to reduce their credit facilities i.e. loans to the people and thus the expansion phase is controlled. However, during a depression phase the reserve ratio is reduced and the commercial banks get more cash to operate their business. Thus these banks are all to increase their loans facilities which then induce entrepreneurs to make investment. This turns the phase of depression towards a revival.

Bank rate is rate at which commercial banks get loans from the central bank. During the phase of an expansion the central bank raise the rate. This phenomenon would discourage the commercial bank from obtaining loan, which in turn would mean that the commercial banks, loan to entrepreneurs would decrease. Hence, the expansion phase is controlled. However, during the depression period the central bank reduces the bank rate. This encourages banks to obtain cheaper loans and thus commercial banks are in turn able to advance cheaper loans to entrepreneurs. Hence, depression is checked and controlled.

Open-Market operation means the open purchases and sale of government securities. During the phase of expansion, the central banks sell securities i.e. government securities to the people in general in the open market at low prices. In order to avail of this golden opportunity, the people make their payments to the central bank by withdrawing their money from the commercial banks. Thus, cash in the commercial banks is reduced greatly and they are forced to ask the people for the repayment of loans. Hence, the money supply is reduced and expansion is controlled.

During the phase of depression the central bank purchases government securities at higher rates and allows the flow of cash in to the hand of the people in general; upon which they deposit their money in commercial banks. Thus, the liquidity position of the commercial banks becomes batter and they are able to offer loans to entrepreneurs for investment. Hence, the money supply increases and depression is controlled.

The margin requirement of commercial banks is the difference in percentage between the difference in percentage between the value of the collateral and the value of the loan given to a client. Such loans are generally obtained against securities.

During the expansion period the central bank raises the margin requirement of the commercial banks due to which, during this particular period, less money is given to the people in the form of loans. As a result the investment level falls and hence the economic boom is checked. Conversely, during the period, of contraction, the margin requirement of commercial banks is lowered down and thus more loans are advanced, investment is encouraged and the contraction of the economy is overcome.

Consumer credit is that form of credit which is obtained by the buyers from the sellers through the purchase of durable consumer goods on installments. During the phase of expansion strict credit regulations are enforced in order to limit the consumer credit whereas during the contraction phase of an economy credit facilities as such are more easily allowed to stabilize the economy. Under this method to stabilization, the commercial banks are sent circular from the central bank, which directs the former to limit their credit facilities during the expansion period; and sometimes even goes as far as giving the commercial banks a stern warning against excessive loans during the boom period. The situation is vice versa in case of a contraction in the economy.

Credit rationing is used by the central bank for commercial banks, when the bank rate policy fails. There is a quota for each bank by which the central bank fixes the amount of credit money for them. Note that this method of control is only applied during the expansion phases as during the phase of contraction in the economy, credit is given generously so that investment may be generated to bring back economic stability. Publicity lets the central bank get hold of the media for the purpose of publishing the annual balance sheets of different commercial banks so that these are making known to the public in order to promote greater awareness of any possible forthcoming liquidation of any commercial bank. In other words, if the balance sheets are low, this would lead people to take out savings for investment in other commercial ventures.

Direct Action would be the last measure that the central bank would resort to as this is a rather arbitrary manner of controlling the credit money. By this method, the central bank simply refuses to give any loan to commercial banks, during the expansion period.