Open market operations are among the foundational tools used in the drafting of a government’s monetary policy. These tools focus on the process of purchasing and selling securities issued by the government in the open market. The primary focus of open market operations is to effectively manage the amount of money that is currently in circulation in the nation’s banking system, and make use of that circulation to deal with current or projected economic conditions that have the potential to undermine the economy.
In actual practice, open market operations are utilized by a national banking system to adjust how banks operating within the country borrow reserves from one another. By utilizing regulations that control the flow of these funds, the task of dealing with an upcoming or a current economic situation is somewhat easier to manage. When employed with other tools that help to structure monetary policy, the government can increase the amount of money that is borrowed, or place limitations on those amounts for a period of time. Generally, this strategy is utilized along with such tools as setting discount rates and expanding or contracting reserve requirements, depending on what must be done to prevent the economy from moving into a less desirable state.
One of the strategies involved with open market operations is the purchase and sale of government securities. While both types of transactions occur on an ongoing basis, open market operations works to adjust the balance between the two transactions in whatever way is anticipated to be in the best interests of the nation’s economy. Essentially, purchases help to increase the flow of money into the banking system, which in turn stimulates additional growth. Sales of governmental securities pull money out of the system and can help to slow growth. Each approach can be helpful in dealing with various economic states, sometimes minimizing the overall impact of an economic crisis.
As with all strategies used to keep a national economy sound, open market operations can only accomplish so much in protecting the economy. Monetary authorities typically use this approach in tandem with other tools in order to cultivate the desired outcome. When the execution of the overall economic plan is timely and composed of the right combination of tools, the effect can be extremely beneficial. Should the plan not make the best use of available tools, and fail to be implemented within the right time frame, the end result can result in economic situations that create hardship for individuals and businesses alike.