Question

Distinguish between dynamic and defensive open market operations. What is the purpose of each type? How are defensive open market operations typically conducted?

Answer 1

Dynamic: Intended to permanently change the monetary base and money supply.

Defensive: Intended to offset temporary fluctuations in demand and supply for reserves.

Defensive operations are used to offset float, shifts in Treasury balances into or out of the Fed, and temporary changes in currency.

Defensive purchase agreements are typically conducted by repurchase agreement, while reverse repo or matched sale purchase transaction are used to conduct defensive OMO.