Active Open Market Operations: A Review of Experience

Abstract

The Central Bank of Sri Lanka introduced a system of active Open Market Operations (OMO) on 03 March 2003 in order to manage liquidity at its own discretion and thereby to achieve monetary policy targets. Under this system, monetary policy operations are conducted to achieve a path of reserve money targets, while maintaining short term interest rates stable around a level, which is consistent with the reserve money targets. This paper reviews the experience under the system during March 2003- June 2005 and presents suggestions, on the basis of the review, for improving the effectiveness of monetary policy operations in achieving their objectives. The paper highlights the need for focusing on overnight interest rates, instead of reserve money, as the operating target, determining the size of daily operations under OMO entirely on the basis of their outcome on interest rates and introducing long term repurchase transactions and auctions for multiple maturities for managing liquidity on a long term basis. (JEL E44, E52) DOI: 10.4038/ss.v36i1.1229 Staff Studies Volume 36 Numbers 1& 2 2006 p.15-35