Posted in Finance, Accounting and Economics Terms, Total Reads: 444
Definition: Open Market
An open market is an economic system characterised by no barriers to free market activity. The various features of such a market include absence of subsidies, licensing requirements, tariffs, taxes, unionization, other regulation practices and any other practice that interferes with the natural functioning of the market.
There are no regulatory barriers to entry even as competitive barriers to entry exist. The implication of all these characteristics is that anyone can participate in an open market.
In the banking and financial industry, the term “open market” refers to the environment in which bonds are being bought and sold between the central bank and the banks regulated by it. It is not a free market process if the Central bank chooses to intervene in the business cycle by going to an open market and selling or buying government securities.
This process is known as an open market operation, undertaken to affect reserves with the Central Bank and ultimately change the Money supply in a desired manner.