Open market operations (OMO) : Definition & Overview
WHAT :: What is OMO (Open market operations) ?
Open market operations (also known as OMO) are when the central bank chooses to buy or sell government bonds on the open market, in order to increase or decrease the amount of money as well as interest rates in the banking system.
WHY :: Why do open market operations take place ?
Open market operations are effective monetary policy in controlling short-term interest rates and inflation.
HOW :: How do open market operations work ?
1. Control recession and increase GDP by buying bonds :
If the central bank buys bonds, there is a release of funds into the economy (increase amount of money in the banking system). As the banks have more money to lend and interest rates will fall, giving people more money to spend in the consumer-based economy. Therefore it would help people find jobs and more people spend and the recession can be "controlled".
2. Control inflation by selling bonds :
Selling the bonds will decrease the money supply, lead to higher interest rates and decrease spending. A fall in food and commodity prices may help reduce inflation.
*Note : Examples of Central Bank :
European Central Bank (ECB),
The Federal Reserve of the United States (FED)
The People's Bank of China (PBC or PBOC)
Soviet Union's Gosbank (State bank)
State Bank of India
The Bank of Japan (BOJ)
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