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Over- and Underbidding in Central Bank Open Market Operations Conducted as Fixed Rate Tender

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  • Bindseil Ulrich

    (European Central Bank, Frankfurt, Germany)

Abstract

Open market operations play a key role in allocating central bank funds to the banking system and thereby in steering short-term interest rates in line with the stance of monetary policy. Many central banks apply so-called ‘fixed rate tender’ auctions in their open market operations. This paper presents, on the basis of a survey of central bank experience, a model of bidding in such tenders. In their conduct of fixed rate tenders, many central banks faced specifically an ‘under-’ and an ‘overbidding’ problem. These phenomena are revisited in the light of the proposed model, and the more general question of the optimal tender procedure and allotment policy of central banks is addressed.

Suggested Citation

  • Bindseil Ulrich, 2005. "Over- and Underbidding in Central Bank Open Market Operations Conducted as Fixed Rate Tender," German Economic Review, De Gruyter, vol. 6(1), pages 95-130, February.
    • Handle: RePEc:bpj:germec:v:6:y:2005:i:1:p:95-130
    DOI: 10.1111/j.1465-6485.2005.00123.x
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    Cited by:

    1. Philipp Hartman & Frank Smets, 2018. "The European Central Bank’s Monetary Policy during Its First 20 Years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 1-146.

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