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Market Information and Signaling in Central Bank Operations, Or, How often Should a Central Bank Intervene?

A central bank must decide on the frequency with which it will conduct open market operations and the variability in short-term money market that it will allow. It is shown how the optimal operating procedure balances the value of attaining an immediate target and broadcasting the central bank’s intentions against the informational advantages to the central bank of allowing the free play of market forces to reveal more of the information available to market participants.

I. INTRODUCTION In almost all industrialized countries, the central bank
implements policy by setting a proximate operational target for short-term money
market interest rates and then using open market operations and other
instruments such ...