Open mouth operations are communications by a
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
that affect Central Bank interest rates.
They are a tool of
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...
. The term was coined by economists
Graeme Guthrie and
Julian Wright
Julian Emil-Jamaal Wright (born May 20, 1987) is an American professional basketball player. He played college basketball for the University of Kansas. In 2014–15, he was the top rebounder in the Israel Basketball Premier League.
High school ...
in the year 2000. While looking at the operations and communications of the
Reserve Bank of New Zealand
The Reserve Bank of New Zealand (RBNZ, mi, Te Pūtea Matua) is the central bank of New Zealand. It was established in 1934 and is constituted under the Reserve Bank of New Zealand Act 1989. The governor of the Reserve Bank is responsible for ...
, these economists found that communications by the central bank had a much more significant effect on the interest rate than did Central Bank operations. Unbeknownst to most economists,
Open Mouth Operations let central banks change interest rates without significantly changing their daily monetary operations.
Mario Draghi's 2012 statement
that “the ECB will do whatever it takes to preserve the euro, and believe me, it will be enough”, is an example of a successful Open Mouth Operation used to lower the interest rates of Spanish government bonds: following the announcement, Spanish government bond interest rates dropped 352
basis points without the ECB having to purchase them.
References
{{reflist
Monetary policy