Polygator 2 days ago

For an international perspective: buying and selling government bonds is far from an universal mechanism for interest rate control (AFAIK when discussing central banks the US is almost always a special case)

For instance the Canadian, UK and European central banks provide systems for interbank short-term loans. It is almost entirely through these systems that they set their target rate.

For Canada the BoC doesn't do any open market operations to reach target interest rate (so almost only repos and reverse repos). Their target rate is in fact called the "target overnight rate" and only concerns overnight lending between Canadian financial institutions.

1
eru 2 days ago

For the interested https://en.wikipedia.org/wiki/Interbank_lending_market#Monet... has more on it.

As far as I understand, the central banks intervene in this market by offering to loan or borrow above or below otherwise prevailing market rates. This has the effect of adding money to the system (or removing it). So that's pretty much the same mechanism as what I described.

They use an intermediate proxy like the 'target overnight rate' to help them decide how much money to add or remove to the system: exactly as much as needed to bring the market interest rate in line with their intermediate proxy.