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Optimal allotment policy in the eurosystem’s main refinancing operations?

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Author Info
Christian Ewerhart () (Institute for Empirical Research in Economics (IEW), University of Zurich, Bluemlisalpstrasse 10, CH-8006 Zurich, Switzerland.)
Nuno Cassola () (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany)
Steen Ejerskov () (European Central Bank, Postfach 160319, 60311 Frankfurt am Main, Germany)
Natacha Valla () (Banque de France, Paris, France)

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Abstract

On several occasions during the period 2001-2003, the European Central Bank (ECB) decided to deviate from its “neutral” benchmark allotment rule, with the effect of not alleviating a temporary liquidity shortage in the banking system. This is remarkable because it implied the possibility of short-term interest rates raising significantly above the main policy rate. In the present paper, we show that when the monetary authority cares for both liquidity and interest rate conditions, the optimal allotment policy may entail a discontinuous reaction to initial conditions. More precisely, we prove that there is a threshold level for the accumulated aggregate liquidity position in the banking system prior to the last operation in a given maintenance period, so that the benchmark allotment is optimal whenever liquidity conditions are above the threshold, and a tight allotment is optimal whenever liquidity conditions are below the threshold. JEL Classification: E43; E52.

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Paper provided by European Central Bank in its series Working Paper Series with number 295.

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Length: 47 pages
Date of creation: Dec 2003
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Handle: RePEc:ecb:ecbwps:20030295

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Keywords: euro; monetary policy instruments; operational framework; refinancing operations.;

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  2. Juan Ayuso & Rafael Repullo, 2003. "A Model of the Open Market Operations of the European Central Bank," Economic Journal, Royal Economic Society, vol. 113(490), pages 883-902, October. [Downloadable!] (restricted)
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  3. 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. [Downloadable!] (restricted)
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  4. Kjell G. Nyborg & Ulrich Bindseil & Ilya A. Strebulaev, 2002. "Bidding and performance in repo auctions - evidence from ECB open market operations," Working Paper Series 157, European Central Bank. [Downloadable!]
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  5. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March. [Downloadable!] (restricted)
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  6. 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. [Downloadable!] (restricted)
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  7. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 137-59, February.
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  8. Steen Ejerskov & Clara Martin Moss & Livio Stracca, 2003. "How does the ECB allot liquidity in its weekly main refinancing operations? A look at the empirical evidence," Working Paper Series 244, European Central Bank. [Downloadable!]
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  1. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, . "Optimal Allotment Policy in Central Bank Open Market Operations," IEW - Working Papers iewwp201, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  2. Ulrike Neyer & Jürgen Wiemers, 2004. "The Influence of a Heterogeneous Banking Sector on the Interbank Market Rate in the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 395-428, September. [Downloadable!]
  3. Julius Moschitz, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 393, European Central Bank. [Downloadable!]
  4. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, 2007. "Manipulation in Money Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 113-148, March. [Downloadable!]
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