Direct operations

Direct operations are a form of monetary policy in which a country's central bank purchases government bonds directly from the government rather than through the secondary market. This process provides immediate liquidity to the government to finance a budget deficit, but it also expands the money supply. ^{[1] [2]}

Overview

Governments issue bonds to raise funds when expenditures exceed revenues, creating a national debt. These bonds are usually sold in the primary market to investors, while the secondary market allows central banks to conduct open market operations by buying or selling existing bonds to influence liquidity.

In some cases, particularly when a nation has a limited secondary market or lacks outstanding government debt, the central bank may conduct direct operations by purchasing new government bonds directly from the treasury. This allows for direct financing of government spending and can be a tool for crisis response or economic stimulus. ^[3]

Mechanism

Direct operations typically work as follows:

1. The government issues new short- or long-term bonds to cover a deficit.
2. The central bank purchases these bonds directly, creating money to pay for them.
3. This increases the monetary base (reserves and currency in circulation).

This mechanism effectively allows the government to obtain funding by expanding the central bank’s balance sheet. While it can stimulate economic activity in the short term, it may also increase inflationary pressure if overused. ^[4]

Comparison with open market operations

• Direct operations occur when a central bank buys newly issued government bonds directly from the government.
• Open market operations involve buying or selling previously issued bonds in the secondary market.

While both influence the money supply, open market operations are more commonly used as they avoid the perception of monetary financing of government deficits.

Advantages and risks

Advantages

• Provides immediate funding for public spending during economic crises.
• Can stimulate growth when conventional monetary policy is constrained (e.g., at the zero lower bound).

Risks

• May lead to inflation or currency depreciation if overused.
• Can undermine central bank independence by blurring the line between fiscal and monetary policy. ^[5]

See also

• Open market operations
• Quantitative easing
• Monetary financing
• Government bond
• Fiscal policy

References

1. Cecchetti, Stephen G. (2020). Money, Banking and Financial Markets (5th ed.). McGraw-Hill Education. pp. 312–315.
2. Blinder, Alan S. (2013). Central Banking in Theory and Practice. MIT Press. pp. 145–150.
3. "Monetary Policy Operations". International Monetary Fund. Retrieved 21 October 2025.
4. Annual Economic Report. Bank for International Settlements. 2019. pp. 78–80.
5. Goodfriend, Marvin (2007). "Monetary Policy and Fiscal Operations". Federal Reserve Bank Review. 89 (4): 45–62.