An open market purchase of securities lead to increase in bank reserves ( Liability side) and increase in assets(asset side) of central bank balance sheet. My doubt is why it leads to increase in Reserves?
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1 Answer
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When the central bank buys anything, it transfers a deposit (reserves) to the reserves account of the bank of the seller. (The seller could be the bank itself, or a customer of the bank.) This keeps everyone’s balance sheet in balance.
Until the central bank does something to destroy reserves (e.g. sell something), all the bank can do is transfer the reserves to other banks. That is, the reserve increase is “permanent,” even if the initial bank gets rid of them.
answered Feb 17, 2018 at 13:28