Open market operation (OMO) is one of the major instruments of conducting the monetary policy in both developing and developed countries. Using this instrument requires a well-developed secondary financial market. OMO can be implemented by using either government or central bank (CB) securities. Developing countries are using the second which raises a question about CB profits and the effect on the economy. This study, through evidence from a small developing country, Jordan, shows that issuing CB securities causes losses which affect the monetary policy continuity. Moreover, the paper extends a model introduced by Walsh (1998) to study the impact of the CB losses on some macroeconomic variables. The model shows that if the CB profits are part of the objective function then inflation, output and growth of the money supply tend to have a positive bias.
ASJC Scopus subject areas
- Economics and Econometrics