Disentangling the supply and announcement effects of open market operations

Narayan Bulusu

Journal of Financial Markets, 2024, vol. 67, issue C

Abstract: Central banks use open market operations (OMOs) to adjust the liquidity available to the financial system to maintain the short-term borrowing rate within the desired target range. Using the conditional event study methodology to decompose the impact of OMOs into supply and announcement effects, this paper finds that when OMO announcements are unexpected, the decrease in the lending rate as a result of the higher supply is significantly moderated by the announcement effect. The results highlight that central banks communicate not just through signals of their desired policy stance, but also through their announcements of operations that implement the stance.

Keywords: Monetary policy implementation; Central bank communication; Open market operations; Lender of last resort; Funding liquidity; Conditional event study (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:67:y:2024:i:c:s1386418123000691

DOI: 10.1016/j.finmar.2023.100871

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