The Central Bank's monetary policy instrument that involves buying and selling securities is called open market operation.
Open market operations refer to the buying and selling of government securities, such as bonds, by the Central Bank in the open market. When the Central Bank buys these securities, it injects money into the economy, and when it sells them, it withdraws money from the economy.
The purpose of open market operations is to influence the supply of money in the economy and thereby control interest rates and stabilize the financial system.
When the Central Bank wants to stimulate economic growth, it can buy government securities from commercial banks and other financial institutions. By doing so, it increases the amount of money in circulation, making more funds available for lending and investment.
This promotes economic activity and helps lower interest rates, encouraging borrowing. On the other hand, if the Central Bank wants to reduce inflation or cool down the economy, it can sell government securities.
By selling these securities, it reduces the money supply, making less funds available for lending and investment. This helps raise interest rates, making borrowing more expensive and reducing economic activity.
Open market operations are considered to be a powerful tool in the Central Bank's arsenal as they have a direct impact on the money supply and interest rates.
They provide flexibility to the Central Bank to adjust the monetary policy conditions based on the prevailing economic situation.
In summary, open market operations are the buying and selling of government securities by the Central Bank to influence the money supply and interest rates in the economy.