Open market operations
202347842
Open Market Operations
Open market operations are the buying and selling of securities by the central bank. Such operations differ from discount operations in that open market operations are undertaken at the initiative of the central bank rather than a commercial bank. Historically, such trading of securities has predated the setting of interest rates. The emergence of long term finance and complex financial systems has extended the range of securities in which central banks may deal. Open market operations depend on the policy framework set by the central bank. But such operations are not necessary for the setting of interest rates. Such operations are often undertaken when the monetary transmission mechanism from interest rates appears to have failed, as in the case of recent quantitative easing operations. In general, open market operations have proved effective in times of banking or financial crisis.
The Oxford Handbook of the Economics of Central Banking
Jan Toporowski
15122402
Open market operations
Abstract In an open market operation, the central bank swaps currency for bonds. We show how injecting money in this way is different from transfers, the way policy is usually formulated. The model captures liquidity explicitly by modeling the roles of assets in frictional exchange. Under various specifications for market structure and the acceptability or pledgeability of assets, we discuss implications for the Fisher and quantity equations, the possibility of negative nominal yields, liquidity traps, and market segmentation. When liquidity is endogenized using information theory, multiple equilibria emerge, with different policy predictions. Interest on reserves and quantitative easing are discussed.
Guillaume Rocheteau Randall Wright Sylvia Xiaolin Xiao
197826072
Open Labor Market Operations
In this fascinating piece, law professor Robert Hockett argues that government policies should stabilize wages in much the same way the Federal Reserve targets XXXX interest rates. He argues that w.
Robert C Hockett
85509100
Bernanke&Apos;S No Arbitrage Argument Revisited: Can Open Market Operations in Real Assets Eliminate the Liquidity Trap?
We first show that, at least in theory, open market operations in real assets can be a useful tool for overcoming a liquidity trap because they change the inflation incentives of the government, and thus change private sector expectations from deflationary to inflationary. We argue that this formalizes Ben Bernanke's arbitrage argument for why a central bank can always increase nominal demand, despite the zero lower bound. We illustrate this logic in a calibrated New Keynesian model assuming the government acts under discretion. Numerical experiments suggest, however, that the needed intervention is incredibly high, creating a serious limitation of this solution to the liquidity trap. Our experiments suggest that while asset purchases can be a helpful commitment device in theory, they may need to be combined in practice with fiscal policy coordination to achieve the desired outcome.
Gauti B Eggertsson Kevin B Proulx
168178214
The Collateral Channel of Open Market Operations
We build a model of collateral choice by banks that allows to recover the opportunity cost of collateral use and the access of banks to the interbank market. We estimate the model using country level data on assets pledged to the European Central Bank from 2009 to 2011. The model can be used to quantify how changes in haircuts affect the collateral used by banks and can provide proxies for the funding cost of banks. Our results suggest for example that a 5% higher haircut on low rated collateral would have reduced the use of this collateral by 10% but would have increased the average funding cost spread between high yield and low yield countries by 5% over our sample period.
Journal of Financial Stability
Nuno Cassola Francois Koulischer
53515464
NON NEUTRALITY OF OPEN MARKET OPERATIONS+
We analyze the effects on inflation and output of unconventional open market operations due to the possible income losses on the central bank's balance sheet. We first state a general Neutrality Property, and characterize the theoretical conditions supporting it. We then discuss three non neutrality results. First, when treasury's support is absent, sizeable balance sheet losses can undermine central bank's solvency and should be resolved through a substantial increase in inflation. Second, a financially independent central bank i.e. averse to income losses commits to a more inflationary stance and delayed exit strategy from a liquidity trap. Third, if the treasury is unable or unwilling to tax households to cover central bank's losses, the wealth transfer to the private sector also leads to higher inflation. Finally, we argue that non neutral open market operations can be used to escape suboptimal policies during a liquidity trap. JEL Classification: E40
David F Archer Marco Bassetto Marco Del Negro Dirk Niepelt Marco Scarsini Christopher A Sims Leopold von Thadden
158187540
Open Market Operations
Scott Reed
55508289
Non Neutrality of Open Market Operations
Unconventional open market operations can have consequences for inflation and output because of income losses on central bank balance sheet. A proposition of neutrality holds under some special monetary and fiscal policy regimes in which the treasury is ready to cover central bank's losses through appropriate transfers levied as taxes on the private sector. In absence of treasury's support, large and recurrent central bank's losses can undermine its long run solvency and should be resolved through a prolonged increase in inflation. Small and infrequent losses can be absorbed by future retained earnings without any further consequences on prices. A central bank averse to declining net worth commits to a more inflationary stance and delayed exit strategy from a liquidity trap. In absence of taxpayers' support, it is also desirable to increase inflation to the end of reducing the duration of central bank's losses.
Pierpaolo Benigno Salvatore Nistico
55538154
Floor Systems and the Friedman Rule: The Fiscal Arithmetic of Open Market Operations
In a floor system of monetary policy implementation, the central bank remunerates bank reserves at or near the market rate of interest. Some observers have expressed concern that operating such a system will have adverse fiscal consequences for the public sector and may even require the government to subsidize the central bank. We show that this is not the case. Using the monetary general equilibrium model of Berentsen et al. (2014) we show how a central bank that supplies reserves through open market operations can always generate non negative net income, even when using a floor system to implement the Friedman rule.
Todd Keister Antoine Martin James McAndrews
3835054
Superneutrality of Money under Open Market Operations
Abstract Monetary policy is superneutral in an overlapping generations model. Previous authors have argued that superneutrality does not hold in such a setting. However, the standard results rely on the counter factual premise of helicopter money and are overturned if money creation through open market operations is taken into account. This result suggests that a more realistic representation of monetary policy may generally be helpful.
Stefan Homburg