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

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  • Juan Ayuso
  • Rafael Repullo

Abstract

We model the two types of tenders used by the European Central Bank in its open market operations. We assume that the ECB minimises a loss function that depends on the difference between the interbank rate and a target rate that characterises the stance of monetary policy. When the loss function penalises interbank rates below the target more heavily, fixed rate tenders have a unique equilibrium with high overbidding, while variable rate tenders have multiple equilibria with moderate overbidding. Our empirical analysis is consistent with the predictions of the model and supports the hypothesis of an asymmetric loss function. Copyright 2003 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 113 (2003)
Issue (Month): 490 (October)
Pages: 883-902

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Handle: RePEc:ecj:econjl:v:113:y:2003:i:490:p:883-902

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  1. Dieter Nautz & Jörg Oechssler, 2001. "The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle," Bonn Econ Discussion Papers bgse9_2001, University of Bonn, Germany.
  2. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The daily market for funds in Europe: Has something changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Campbell, John Y, 1987. "Money Announcements, the Demand for Bank Reserves, and the Behavior of the Federal Funds Rate within the Statement Week," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 56-67, February.
  4. repec:wop:humbsf:1999-79 is not listed on IDEAS
  5. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
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