## Market Information and Signaling in Central Bank Operations, or, How Often Should a Central Bank Intervene?

_IMF Working Papers, March 1, 1997_

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## Bibliographic details
- Published: March 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451844627.001

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### Summary and core finding
- A central bank must decide on the frequency with which it will conduct open market operations and the variability in short-term money market that it will allow.
- The optimal operating procedure balances:
  - the value of attaining an immediate target and broadcasting the central bank’s intentions; and
  - the informational advantages to the central bank of allowing the free play of market forces to reveal more of the information available to market participants.

### Analysis themes and implications
- Market information vs. signaling trade-off:
  - Frequent interventions help attain immediate targets and communicate intentions.
  - Less frequent interventions enable markets to reveal private information, improving informational efficiency for the central bank.
- Operational design considerations:
  - Choice of intervention frequency influences short-term money market variability.
  - The central bank’s loss function and market development affect the optimal balance between intervention and nonintervention.
- Relevance to monetary policy implementation:
  - Findings relate directly to open market operations, money market equilibrium yields change, and short term interest rates.
  - Informational efficiency of functioning markets and behavior of market participants are central to implementation choices.

### Policy recommendations (implied by analysis)
- Calibrate intervention frequency to trade off immediate control versus information acquisition from markets.
- Consider the stage of market development and the informational environment when designing operating procedures.
- Use signaling strategically: intervene when broadcasting intentions yields net benefits relative to the information foregone by markets.

### Subjects and keywords
- Subject: Banking; Central bank operations; Central banks; Financial markets; Financial services; Market interest rates; Money markets; Open market operations; Short term interest rates
- Keywords: Central bank operations; central banking; functioning market; informational efficiency; loss function; market development; market information; Market interest rates; market participant; market rate; monetary policy implementation; money market; money market equilibrium yields change; money market interest rates; money market rate; Money markets; open market operations; Short term interest rates; WP

*International Monetary Fund — "Market Information and Signaling in Central Bank Operations, or, How Often Should a Central Bank Intervene?" (IMF Working Papers 1997, 028).*

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