Economics
Open Market Operations
Open market operations refer to the buying and selling of government securities by a central bank in the open market to control the money supply and influence interest rates. When a central bank wants to increase the money supply, it buys government securities, and when it wants to decrease the money supply, it sells government securities. These operations are a key tool for implementing monetary policy.
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10 Key excerpts on "Open Market Operations"
- International Monetary Fund(Author)
- 1997(Publication Date)
- INTERNATIONAL MONETARY FUND(Publisher)
Transformations to Open Market Operations: Developing Economies and Emerging Markets
By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply. When the central bank sells such instruments it absorbs money from the system. Conversely, when it buys it injects money into the system. This method of trading in the market to control the money supply is called Open Market Operations.Open Market Operations are the major instrument of monetary control in industrial countries and are becoming important to developing countries and economies in transition. Open Market Operations allow central banks great flexibility in the timing and volume of monetary operations at their own initiative, encourage an impersonal, businesslike relationship with participants in the marketplace, and provide a means of avoiding the inefficiencies of direct controls. Developing indirect controls is important to the process of economic development because, as a country’s markets expand, direct controls tend to become less effective, and markets eventually find a way around them, especially in a global world economy. With more countries seeking to deregulate and unleash the potential of market forces, many policymakers and central bankers are grappling with ways to realize the full benefits of Open Market Operations.For such operations to become part of monetary policy, however, other monetary instruments now in place need to be adjusted and the market infrastructure must be transformed. This paper assesses the options available to a central bank for addressing these matters and designing instruments for implementing Open Market Operations. First, it provides a brief review of the connection between Open Market Operations and other monetary operations. Then, it discusses how the central bank can encourage development of the necessary financial market architecture. Finally, it reviews the advantages and limitations of specific approaches to Open Market Operations.
eBook - PDFReforms in China's Monetary Policy
A Frontbencher's Perspective
- Sun Guofeng(Author)
- 2016(Publication Date)
- Palgrave Macmillan(Publisher)
Because the precondition for economic transactions is the will- ingness of both sides, the central bank cannot force the trading counterpar- ties to accept the terms of transaction. If the central bank is to supply base 138 ● Reforms in China’s Monetary Policy money into circulation, it must decrease interest rate; however, it must raise the interest rate in the case of withdrawing money from circulation. Unlike other monetary policy tools, Open Market Operations can change the inter- est rate or price in a relatively flexible way, the adjustment may be large or subtle, and the open bidding method is adopted with sound interest rate and quantity formation mechanism. The amount of base money contributed to or taken back from Open Market Operations can be allocated to the primary dealers of Open Market Operations via market-oriented auction method and then allocated to the whole money market and bond market. In practice, the central bank allows complete realization of base money target with some fluctuations of interest rates in the money market and bond prices, or reali- zation of the target of interest rate and bond price with some fluctuations of base money. There are two ways for Open Market Operations to influence the interest rates in the money market. One is to directly influence the market interest rate via the published Open Market Operations interest rate; the other is to change the quantity of banking system liquidity via Open Market Operations, which in return affects the market fund demand and supply and serves the function of regulating and controlling market interest rates. In fact, these two aspects are inseparable. If Open Market Operations want to inject base money, it must lower the interest rate or increase the price, and vice visa.
eBook - ePubCentral Banking
Theory and Practice in Sustaining Monetary and Financial Stability
- Thammarak Moenjak(Author)
- 2014(Publication Date)
- Wiley(Publisher)
By announcing its intention to keep the policy interest rate at a particular level, the central bank can induce participants in the money market to borrow and lend among themselves at rates that are not too far off from the policy interest rate. Normally, market participants are encouraged to borrow and lend among themselves first before turning to the central bank. Competition among market participants would normally ensure that they borrow and lend among themselves at rates that are not too extreme. 16 Yet, if it seems that shortages or surpluses of funds would not be cleared easily at rates of interest near the policy interest rate, then the central bank can always step in and inject or drain out funds from market participants directly, through Open Market Operations. With the knowledge that the central bank can always step in to ensure that rates do not go much out of line with the policy interest rate, market participants would normally borrow and lend near or at the policy rate anyhow. This, of course, is unless there is a large systemic shortage or surplus of funds that drives market participants to borrow and lend at rates far removed from the policy rate. 17 Open Market Operations When conducting Open Market Operations, central bank injects or absorbs funds from the money market at the margin, so as to prevent excessive net shortages or surpluses of funds from driving a large wedge between prevailing interest rates and the policy rate. 18 Open Market Operations normally means purchasing and selling of securities (normally government securities and central bank bills) to market participants. With a purchase of securities, the central bank is effectively injecting funds into the system, since the central bank has to pay for those securities with money
eBook - ePub- David Mayes, Jan Toporowski(Authors)
- 2007(Publication Date)
- Routledge(Publisher)
4 Open Market Operations – their role and specification todayUlrich Bindseil and Flemming Würtz*Although used by central banks in the nineteenth century, Open Market Operations were only explicitly praised as a supposedly superior tool of central bank policy in the early 1920s. This ‘discovery’ of Open Market Operations occurred in tandem with the rise of reserve position doctrine and the dismissal of the traditional steering of short-term interest rates mainly through setting of the discount rate. The idea of a purely quantitative transmission mechanism and the associated supremacy of Open Market Operations survived, until recently, in particular amongst US academics. Only the unambiguous return to interest rate steering by the Fed in the 1990s and the appearance of new academic impulses as exemplified by Taylor (1993) and Woodford (2003), who put no emphasis on monetary quantities as operational targets of monetary policy, seem to have also put into question the belief in the supremacy of Open Market Operations and in the evil of standing facilities. Nevertheless, undergraduate text books still continue to devote ample space to the money multiplier, which makes so little sense under the new consensus.This chapter revisits the role and specification of Open Market Operations after the fall of the reserve position doctrine and the return to explicit short-term interest rate steering by central banks. The next section provides a short summary of the rise and fall of the reserve position doctrine, and in particular of the associated evolution of the perceived role of Open Market Operations. It is followed by a section defining and distinguishing ‘Open Market Operations’ and ‘standing facilities’ more precisely and providing a short classification of monetary policy implementation approaches into ‘Open Market Operations based’ and ‘standing facilities based’ ones. It highlights a kind of continuum between the two types of operation and between the two types of approach. Given the unambiguous return to short-term interest rate steering, a simple model is used to argue that standing facility based approaches may appear more efficient than the relatively complicated open market based approaches, which are applied by most central banks today.
- Daniel S. Ahearn(Author)
- 2019(Publication Date)
- Columbia University Press(Publisher)
Open Market Operations 51 Setting out the reasons for the adoption of the new principles for open market policy, the Federal Reserve said: These three decisions did not change basic policy objectives. They were taken after intensive re-examination in 1952 of the techniques then employed in System Open Market Operations with particular reference to the potential impact of such techniques on market behavior. Their pur-pose was to foster a stronger, more self-reliant market for Government securities. Improvement in this market was desired ( 1 ) in order that the Federal Reserve might better implement flexible monetary and credit policies, (2) to facilitate Treasury debt management operations, and (3) to encourage broader private investor participation in the Government securities market. The decisions were taken to remove a disconcerting degree of uncer-tainty that existed at that time among market intermediaries and financial specialists. The market was uncertain, first, with respect to the limits the Federal Open Market Committee had in mind in its directive to main-tain an orderly market in Government securities. A second uncertainty pertained to the occasions when the System might decide to operate di-rectly in the intermediate and long-term sectors of the market to further its basic monetary policy objectives, i.e., to ease intermediate and long-term interest rates in periods of economic slack or to firm these rates in periods of exuberance. Both of these uncertainties related solely to transactions initiated by the System outside the short end of the market, transactions which had as their immediate objective results other than a desire to add to or ab-sorb reserves from the market. The effect, however, was to limit signifi-cantly the disposition of market intermediaries and financial specialists to take positions, make continuous markets, or engage in arbitrage in issues outside the short end of the market.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
The primary tool of monetary policy is Open Market Operations. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, company bonds, or foreign currencies. All of these purchases or sales result in more or less base currency entering or leaving market circulation. Usually, the short term goal of Open Market Operations is to achieve a specific short term interest rate target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold. For example, in the case of the USA the Federal Reserve targets the federal funds rate, the rate at which member banks lend to one another overnight; however, the monetary policy of China is to target the exchange rate between the Chinese renminbi and a basket of foreign currencies. The other primary means of conducting monetary policy include: (i) Discount window lending (lender of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain market players to achieve specified outcomes); (iv) Open mouth operations (talking monetary policy with the market). Theory Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment.
- Thomas F. Cargill(Author)
- 2017(Publication Date)
- Cambridge University Press(Publisher)
13.3 General Tools of Monetary Policy 281 13.3 General Tools of Monetary Policy The general tools of monetary policy are designed to influence base money, the money supply and interest rates. There are three traditional general tools and two new general tools that are utilized by the Federal Reserve. The traditional general tools are: Open Market Operations; discount policy; and changes in reserve require-ments. The two new general tools of monetary policy are: interest paid on excess reserves, introduced in 2008; and the term deposit facility, introduced in 2010. The two new tools have not been used to any great extent, there is uncertainty as to how they will be used in the future and there is debate as to whether they effectively contribute to the Federal Reserve’s ability to conduct monetary policy. Open Market Operations: Open Market Operations are reflected by the Fed-eral Reserve’s holdings of security (S in Table 12.1 ) and were used to illustrate the money supply process in the T accounts in Chapter 12 . Whenever the Fed-eral Reserve purchases securities, reserves of depository institutions increase and, hence, base money increases, dollar for dollar. Whenever the Federal Reserve sells securities, reserves of depository institutions decrease and, hence, base money decreases, dollar for dollar. Open Market Operations are divided into permanent and temporary operations. Permanent Open Market Operations involve the outright purchase and sale of Trea-sury securities, government-sponsored enterprise debt securities and mortgage-related securities without any commitment to the sellers and purchasers, respec-tively. Temporary Open Market Operations include purchases of these securities under agreements to resell to the dealer at a set time, amount and price ( repurchase agreement, repo or RP ) and sales of these securities under agreements to repur-chase from the dealer at a set time, amount and price ( reverse repurchase agree-ment, reverse repo or reverse RP ).
- Michael Brandl(Author)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
The Fed has several different ways to conduct OMOs; however, most often OMOs are undertaken by the buying and selling of government securities to influence the level of bank reserves. One of the keys to understanding OMOs is to keep in mind that this is the buying and selling of government securities in the secondary market. This means the Fed is not buying government securities directly from the government. Instead, it is buying/selling government securities from or to a private entity. To understand how an OMO works, imagine a highly simplistic world where there is a big room in which the buyers and sellers of government securities meet to trade. Let’s further suppose the Fed is pursuing an expansionary OMO—that is, the Fed is seeking to increase the level of bank reserves and thus increase the monetary base to push market interest rates lower. Expansionary OMO The Fed enters the room (the market) and approaches someone who is interested in selling government bonds. Suppose in the room is Ms. Rice, who had at some point in the past purchased $10 million of government securities. Ms. Rice now would like to sell these bonds, perhaps because she needs cash. 1 Expansionary fiscal policy also was used to combat the Great Recession, but that is beyond the scope of our discussion here. Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 195 CHAPTER 9 Monetary Policy Tools The Fed will engage in a transaction with Ms. Rice: She will send to the Fed $10 million of govern-ment securities. Let us further assume Ms. Rice has a demand deposit account at Bank of America.
eBook - PDFExplaining and Forecasting the US Federal Funds Rate
A Monetary Policy Model for the US
- M. Clements(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
INTRODUCTION The Fed describes monetary policy as ‘actions undertaken ... to influ- ence the availability and cost of money and credit to help promote national economic goals’. The Federal Reserve Act specifies that in conducting monetary policy, the Federal Open Market Committee (FOMC) should seek ‘to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates’. The Fed controls the three main tools of monetary policy: Open Market Operations (the FFR), the discount rate, and reserve require- ments. This book examines only the FFR, which is influenced by Open Market Operations, the buying and selling of securities, which is the Fed’s primary instrument for controlling monetary policy. The FOMC is responsible for Open Market Operations and setting the FFR. The committee comprises 12 voting members and meets at eight scheduled meetings a year. The FFR is the interest rate at which depository institutions (banks) lend balances at the Fed to each other overnight. Changes in the FFR in turn affect other interest rates, both long and short term, such as government and corporate bonds, mort- gage and credit rates. The exchange rate of the dollar is also sensi- tive to changes in the FFR. Using this rate, the Fed can affect the price of money and credit. In this way it influences employment, output and inflation. Strictly speaking, the Fed’s mandate of ‘price stability’ is a misnomer. Price stability means, by definition, zero inflation. Also, CHAPTER 2 Monetary Policy at the US Federal Reserve 27 the mandate does not specify which inflation measure should be targeted. In reality, the Fed looks to achieve inflation stability using an inflation measure that it considers to best represent price move- ments across the economy. In February 2000, the Fed ostensibly signalled a preference for the Commerce Department’s Personal Consumption Expenditure (PCE) price index as its chosen inflation measure.
eBook - PDFMonetary Economics
Policy and its Theoretical Basis
- Keith Bain, Peter Howells(Authors)
- 2017(Publication Date)
- Red Globe Press(Publisher)
The handbook (no.24) written for the Centre for Central Banking Studies, written by Gray and Talbot and titled Monetary Operations gives the most detailed account of the procedures (and choices) involved in setting interest rates. It can be found at: www.bankofengland.co.uk/education/ccbs/handbooks/index.htm Borio (1997) confirms the widespread similarity of these procedures across countries. The fact that these operating procedures have the effect of making the money supply endogenous is documented in Goodhart ( op cit and 2002) and in Howells’s essay in P Arestis and M C Sawyer (eds) (2001). This also surveys a number of issues arising from the endogeneity of money. H M Treasury (2002) provides the background to the conduct of monetary policy in the UK in recent years. Chs. 3-6 explain the monetary policy framework, the choice of an inflation target and the conduct of an independent Bank of England. The 2006 changes in Bank of England money market operations can be found on the Bank’s website: www.bankofengland.co.uk/markets/money/index.htm Further details are available in The Framework for the Bank of England’s Operations in the Sterling Money Markets (the ‘Red Book’). This also can be found on the Bank of England’s website. 119
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