Open Market Operations
The purchase or sale of government bonds by the central bank of a country.
(Peter Dungan, Toronto PPG1002H and Principles of Macroeconomics by Mankiw, Kneebone, McKenzie and Rowe.)
Open Market Operations are one of the most important mechanisms by which central banks can expand or contract the money supply.
To expand the money supply, the bank buys government bonds on the open market from commercial banks, paying them by crediting the bank with additional reserves. The commercial bank now has extra reserves and can expand its loans and deposits, leading to an expansion of the money supply. Similarly, the Bank of Canada can contract the money supply by selling bonds on the open market thereby reducing the reserves of commercial banks.
Information for this concept organized by Ben Eisen based on lecture notes from Peter Dungan’s PPG 1003H and the textbook Principles of Macroeconomics by Mankiw, Kneebone, McKenzie and Rowe.