Open mouth operations are communications by a
central bank
A central bank, reserve bank, national bank, or monetary authority is an institution that manages the monetary policy of a country or monetary union. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the mo ...
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 affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rat ...
. The term was coined by economists
Graeme Guthrie and
Julian Wright 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) () is the central bank of New Zealand. It was established in 1934 and is currently constituted under the ''Reserve Bank of New Zealand Act 2021''. The current acting governor of the Reserve Bank, Christian ...
, 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
Mario Draghi (; born 3 September 1947) is an Italian politician, economist, academic, banker, statesman, and civil servant, who served as the prime minister of Italy from 13 February 2021 to 22 October 2022. Prior to his appointment as prime mi ...
'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
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Monetary policy