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

Rafael Repullo and Juan Ayuso

No 2605, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We construct a model to analyse the two types of tender procedures used by the European Central Bank (ECB) 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 preannouncing the intended liquidity injection. Finally, our empirical analysis supports the assumption of an asymmetric loss function for the ECB.

Keywords: European central bank; Monetary policy instruments; Open market operations; Tender procedures; Monetary auctions (search for similar items in EconPapers)
JEL-codes: D44 E52 E58 (search for similar items in EconPapers)
Date: 2000-11
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Citations: View citations in EconPapers (19)

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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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