Transformation of Markets and Policy Instruments for Open Market Operations

IMF Working Papers, December 1, 1995

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Canonical URL: Transformation of Markets and Policy Instruments for Open Market Operations

Developing countries and economies in transition have shifted toward using open market operations as a tool of monetary policy as they rely on deregulated, competitive markets to spur growth.
For open market operations to be most effective, they require:
- supportive changes in other policy instruments (reserve requirements, discount window),
- a competitive banking system and securities market,
- adaptation of particular open market or market-type instruments to the stage of, and potential for, market development.
The paper assesses options available to a central bank for:
- encouraging a competitive market architecture,
- designing instruments for implementation of open market operations.

Reform complementary policy instruments (explicitly: reserve requirements and the discount window) to support the transition to open market operations.
Promote development of a competitive banking system and securities market as prerequisites for effective implementation.
Tailor open market or market-type instruments to the specific stage of market development and its potential, rather than applying a one-size-fits-all instrument set.
Central banks should evaluate and select among available instrument designs to align with market architecture and development objectives.

Subject: Banking, Central banks, Financial institutions, Financial markets, Government securities, Monetary base, Money, Money markets, Open market operations, Securities markets
Keywords: active market, commercial paper, discount window, excess reserves, Government securities, market development, market instrument, market-type operation, Monetary base, Money markets, Open market operations, Securities markets, WP