Open market operations

Open market operations are all those operations of purchase and sale of financial assets carried out by a central bank. They constitute the most important instrument of monetary policy.

They are called open market operations because they are operations that are not carried out directly with the issuer of the security, but are carried out in secondary  fixed or variable income markets.

Objectives of open market operations

They have very defined objectives:

  • Control interest rates.
  • Manage the liquidity situation of the market, injecting or draining resources according to the needs of the system.
  • Indicate the orientation of monetary policy.

Open market transaction categories

There are many categories of open market operations. To summarize we will list the four categories established by the European System of Central Banks (ESCB). These categories are based on the specific purpose pursued with said operation, although said purpose also determines the frequency of use of said operations and the procedure to be followed in it.

  • Main financing operations: To inject liquidity.
  • Longer-term financing operations: To inject liquidity.
  • Structural operations: Both to inject or drain liquidity.
  • Adjustment operations: Both to inject or drain liquidity.

The injection of liquidity in the market corresponds to an expansive monetary policy , while the drainage of liquidity in the market corresponds to a restrictive monetary policy .

Instruments of open market operations

The five main instruments to carry out type of operation are the following:

  1. Temporary operations:Basically they are repos .
  2. Purchase-Sales at maturity: These are operations in which the Eurosystem makes purchases (known as quantitative easing ) or simple sales of assets in the market.
  3. Issuance of debt certificates:The ECB can issue debt certificates to adjust the structural position of the Eurosystem vis-à-vis the financial sector and thus create or widen the market liquidity deficit.
  4. Currency swaps:These are simultaneous spot and forward operations of euros against currencies (currency swaps ).
  5. Term Deposits:The Eurosystem may propose to counterparties to set up fixed-term interest-bearing deposits at the Central Bank of the Member State in which the entity is established.

 

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