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Optimal allotment policy in central bank open market operations Author info | Abstract | Publisher info | Download info | Related research | Statistics Christian Ewerhart
Nuno Cassola
Steen Ejerskov
Natacha Valla
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This article derives a central bank's optimal liquidity supply towards a money market with an unrestricted lending facility. We show that when the effect of liquidity on market rates is not too small, and the monetary authority is concerned with both interest rates and liquidity conditions, then the optimal allotment policy may entail a 'discontinuous' reaction to initial conditions. In particular, the model predicts a threshold level of liquidity below which the central bank will not bail out the banking system. An estimation of the liquidity effect for the euro area suggests that the discontinuity might have contributed to the Eurosystem's tight response to occurrences of underbidding during the period June 2000 through March 2004.
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Article provided by Taylor and Francis Journals in its journal The European Journal of Finance .
Volume (Year): 15 (2009)
Issue (Month): 4 ()
Pages: 405-420
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Handle: RePEc:taf:eurjfi:v:15:y:2009:i:4:p:405-420Contact details of provider: Web page: http://taylorandfrancis.metapress.com/link.asp?target=journal&id=100161
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For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).
Keywords: open market operations ; liquidity effect ; standing facilities ; underbidding ; Other versions of this item:
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