The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle*

Dieter Nautz and Jörg Oechssler

Scandinavian Journal of Economics, 2003, vol. 105, issue 2, 207-220

Abstract: Until June 2000 the European Central Bank (ECB) used fixed rate tenders for its weekly repo auctions. A switch to variable rate tenders became necessary due to massive overbidding by banks. In this paper we introduce a stylized game among banks to investigate this overbidding phenomenon. Our results confirm the weakness of the fixed rate tender format and indicate that the ECB's liquidity management has significantly improved since the switch to the variable rate system. Yet recent episodes of rate cut expectations suggest that the ECB's practice of setting a minimum bid rate should be abandoned in favor of a more symmetric interest rate target.

Date: 2003
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