Citation

Discussion Paper Details

Please find the details for DP2605 in an easy to copy and paste format below:

Full Details

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

Author(s): Juan Ayuso and Rafael Repullo

Publication Date: November 2000

Keyword(s): European Central Bank, Monetary Auctions, Monetary Policy Instruments, Open Market Operations and Tender Procedures

Programme Area(s): Financial Economics and International Macroeconomics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2605

Bibliographic Reference

Ayuso, J and Repullo, R. 2000. 'A Model of the Open Market Operations of the European Central Bank'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2605