A Model of the Open Market Operations of the European Central Bank

Juan Ayuso () and Rafael Repullo
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Juan Ayuso: Banco de España

No 16, Working Papers from Banco de España

Abstract: We construct a model to analyse the two types of tender procedures used by the European Central Bank in its open market operations. We assume that the ECB minimizes the expected value of a loss function that depends on the quadratic difference between the interbank rate and a target interest rate that characterizes the stance of monetary policy. We show that when the loss function penalizes more heavily interbank rates below the target, fixed rate tenders have a unique equilibrium characterized by extreme overbidding. We also show that variable rate tenders have multiple equilibria characterized by varying degrees of overbidding, and that in these tenders an equilibrium without overbidding can be obtained by preannoucing the intended liquidity injection. Finally, our empirical analysis supports the assumption of an asymmetric loss function for the ECB.

Keywords: market; interest rate; monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2000
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Citations: View citations in EconPapers (20)

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http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... o/00/Fic/dt0016e.pdf First version, 2000 (application/pdf)

Related works:
Journal Article: A Model of the Open Market Operations of the European Central Bank (2003)
Working Paper: A Model of the Open Market Operations of the European Central Bank (2000)
Working Paper: A Model of the Open Market Operations of the European Central Bank (2000)
Working Paper: A Model of the Open Market Operations of the European Central Bank (2000)
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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:0016

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