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Encyclopedia > Open market operations

Open Market Operations are the means by which central banks control the liquidity of the national currency. This management of liquidity is used to achieve certain monetary targets. It is the basis for monetary policy.


The process entails the use of newly minted national currency to buy in the open market some financial asset, typically gold, foreign currency or government bonds. Alternatively it may involve the selling in the open market of a financial asset in order to redeem back national currency.


These operations affect the liquidity of the national currency. They increase or decrease the amount of national currency that is in circulation. This currency component of the money supply is known as M0.


Under most inflation targeting monetary systems open market operations are used to achieve and maintain a target interest rate. This target interest rate is periodically reviewed. Under such a scheme inflation is typically defined and measured using a consumer price index.


Under a gold standard such open market operations would be used to achieve and maintain a target gold price. The goal would be to always keep the value of the currency near constant relative to gold.


Under a currency board such open market operations would be used to achieve and maintain a fixed exchange rate with some foreign currency.


Economist Robert Mundell has famously stated that when using open market operations it is only possible to pursue a single target at any given time. You can not use open market operations to target interest rates whilst being on a gold standard. Likewise if you are targeting interest rates then the price of gold will fluctuate.


See also

External links

Data

  • Open Market Operations-Home Page (http://www.omo.co.nz/)
  • Yahoo! - Treasury News (http://biz.yahoo.com/n/z/z0003.html)

  Results from FactBites:
 
Economic Issues No. 5--Transformations to Open Market Operations (5465 words)
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.
Open market operations in which special securities are issued for purposes of monetary policy are of most practical use when excess liquidity is flooding the banking system.
open market operation: Information from Answers.com (2285 words)
Open market operations are the means of implementing monetary policy by which a central bank controls its national money supply by buying and selling government securities, or other instruments.
Under a currency board open market operations would be used to achieve and maintain a fixed exchange rate with relation to some foreign currency.
The European Central Bank has similar mechanisms for their operations; however, it uses a four-tiered approach with different goals: beside its main goal of steering and smoothing Euroland interest rates while managing the liquidity situation in the market the ECB also has the aim of signalling the stance of monetary policy with its operations.
  More results at FactBites »

 
 

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