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Under the traditional system a bank lends out money, which creates deposits. It then subsequently goes to the interbank market to obtain central bank reserves in order to meet its liquidity requirement. The central bank then buys sovereign bonds into the interbank market in order to maintain the target overnight rate (repaying the loan reverses all these operations).

Could you explain what is meant by "The central bank buys sovereign bonds INTO the interbank market..."? I can understand selling into or buying from but buying into sounds like what happens when one is taken by a con - one buys into the con, i.e. believes it is real. Knowing how so much of our financial system works.....

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Jan 11th, 2011 at 11:52:41 PM EST

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