open market operation

open market operation

Any of the purchases and sales of government securities and commercial paper by a central bank in an effort to regulate the money supply and credit conditions. Open market operations can also be used to stabilize the prices of government securities. When the central bank buys securities on the open market, it increases the reserves of commercial banks, making it possible for them to expand their loans and investments. It also increases the price of government securities, equivalent to reducing their interest rates, and decreases interest rates generally, thus encouraging investment. If the central bank sells securities, the effects are reversed. Open market operations are usually performed with short-term government securities such as treasury bills.