Editing Monetary policy (section)

=== Open market operations ===
[[File:Mechanism of Open Market Operations in Market for Reserves.svg|thumb|Mechanics of open market operations: Demand-Supply model for reserves market]]
Through [[open market operation]]s, a central bank may influence the level of interest rates, the exchange rate and/or the money supply in an economy. Open market operations can influence [[interest rate]]s by expanding or contracting the [[monetary base]], which consists of currency in circulation and banks' reserves on deposit at the central bank. Each time a central bank buys [[Security (finance)|securities]] (such as a [[government bond]] or treasury bill), it in effect [[Money creation|creates money]]. The central bank exchanges money for the security, increasing the monetary base while lowering the supply of the specific security. Conversely, selling of securities by the central bank reduces the monetary base.[[File:1979 $10,000 Treasury Bond .jpg|thumb|1979 $10,000 [[United States Treasury security|United States Treasury bond]]]] Open market operations usually take the form of:

* Buying or selling securities ("[[direct operations]]").
* Temporary lending of money for [[Collateral (finance)|collateral]] securities ("Reverse Operations" or "[[Repurchase agreement|repurchase operations]]", otherwise known as the "repo" market). These operations are carried out on a regular basis, where fixed [[Maturity (finance)|maturity]] loans (of one week and one month for the ECB) are auctioned off.
* [[Foreign exchange market|Foreign exchange]] operations such as [[foreign exchange swap]]s.