Market-Implemented Monetary Policy with Open Mouth Operations

33 Pages Posted: 8 Apr 1998  

Julian Wright

National University of Singapore (NUS) - Department of Economics

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

Date Written: April 3, 1998

Abstract

This paper presents a model in which investors, acting in self-interest, force interest rates to the levels desired by the monetary authority. If interest rates move out of line with those required by the monetary authority, a statement (an open mouth operation) is all that is needed to restore them. We argue the current implementation of monetary policy in New Zealand works in this way. Using announcement data from New Zealand, we find that open mouth operations lead to large changes in interest rates across all maturities, and these changes cannot be explained by open market operations. Implications are drawn for research in other areas, in particular the news approach to exchange rate modeling, the expectations theory of the term structure of interest rates and measuring the liquidity effect.

JEL Classification: E52, E58, E42, E43

Suggested Citation

Wright, Julian and Guthrie, Graeme, Market-Implemented Monetary Policy with Open Mouth Operations (April 3, 1998). Available at SSRN: https://ssrn.com/abstract=74657 or http://dx.doi.org/10.2139/ssrn.74657

Julian Wright (Contact Author)

National University of Singapore (NUS) - Department of Economics ( email )

AS2 Level 6, 1 Arts Link
Singapore 117570
Singapore
6568743941 (Phone)
6567752646 (Fax)

HOME PAGE: http://profile.nus.edu.sg/fass/ecsjkdw/

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6001
New Zealand
64 4 463 5763 (Phone)
64 4 495 5014 (Fax)

HOME PAGE: http://contemporaryfinance.com/

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