Disentangling the supply and announcement effects of open market operations.

Central banks use open market operations (OMOs) to adjust the liquidity available to the financial system to maintain the short-term borrowing rate within the desired target range. Using the conditional event study methodology to decompose the impact of OMOs into supply and announcement effects, this paper finds that when OMO announcements are unexpected, the decrease in the lending rate as a result of the higher supply is significantly moderated by the announcement effect. The results highlight that central banks communicate not just through signals of their desired policy stance, but also through their announcements of operations that implement the stance. • Central banks use OMOs to fine-tune liquidity supplied to the financial system • I use the conditional event study methodology to decompose the impact of OMOs • The change in lending rate due to OMOs consists of supply and announcement effects • Unexpected OMOs moderate the decrease in lending rate from increased liquidity supply • Unforeseen OMOs could reveal information about prevailing liquidity conditions • Central banks also communicate through operations that implement their policy stance [ABSTRACT FROM AUTHOR]