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The repo auctions of the European Central Bank and the vanishing quota puzzle

Dieter Nautz () and Jörg Oechssler

No 1999,79, SFB 373 Discussion Papers from Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes

Abstract: Weekly repo auctions are the European Central Bank's most important policy instrument. Provided that banks bid seriously, these auctions should reveal useful information about banks' liquidity needs and the stance of monetary policy. However 1 as we show in this paper, the applied auction rules specify a game without equilibrium. In particular, banks have incentives to grossly exaggerate their needs for refinancing. In response, they are drastically rationed, and the allotment quota virtually vanishes over time, which makes banks' bids useless as a monetary indicator. Our empirical results suggest that banks are requesting more than 25 times the amount they actually need - with increasing trend.

Keywords: monetary policy instruments; auctions; European Central Bank (search for similar items in EconPapers)
JEL-codes: E52 D44 (search for similar items in EconPapers)
Date: 1999
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Related works:
Journal Article: The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle* (2003) Downloads
Working Paper: The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle (2001) Downloads
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