Optimal allotment policy in the Eurosystem's main refinancing operations

Nuno Cassola, Steen Ejerskov, Christian Ewerhart and Natacha Valla

No 295, Working Paper Series from European Central Bank

Abstract: On several occasions during the period 2001-2003, the European Central Bank (ECB) decided to deviate from its "neutral" benchmark allotment rule, with the effect of not alleviating a temporary liquidity shortage in the banking system. This is remarkable because it implied the possibility of short-term interest rates raising significantly above the main policy rate. In the present paper, we show that when the monetary authority cares for both liquidity and interest rate conditions, the optimal allotment policy may entail a discontinuous reaction to initial conditions. More precisely, we prove that there is a threshold level for the accumulated aggregate liquidity position in the banking system prior to the last operation in a given maintenance period, so that the benchmark allotment is optimal whenever liquidity conditions are above the threshold, and a tight allotment is optimal whenever liquidity conditions are below the threshold. JEL Classification: E43, E52

Keywords: euro; monetary policy instruments; operational framework; refinancing operations- (search for similar items in EconPapers)
Date: 2003-12
Note: 334845
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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