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Equilibrium and inefficiency in fixed rate tenders

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Author Info
Christian Ewerhart () (Correspondence: Institute for Empirical Research in Economics (IEW), University of Zurich, Winterthurerstrasse 30, 8006 Zurich, Switzerland)
Nuno Cassola () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany)
Natacha Valla () (Banque de France, B.P. 140-01, 75049 Paris Cedex 01, France)

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Abstract

The fixed rate tender is one of the main procedural formats relied upon by central banks in their implementation of monetary policy. This fact stands in a somewhat puzzling contrast to the prevalent view in the theoretical literature that the procedure, by fixing interest rate and quantity at the same time, does not allow a strategic equilibrium. We show that an equilibrium exists under general conditions even if bidders expect true demand to exceed supply on average. The outcome is typically inefficient. It is argued that the fixed rate tender, in comparison to other tender formats, may be an appropriate instrument for central bank liquidity management when market conditions are sufficiently calm.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 554.

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Length: 33 pages
Date of creation: Nov 2005
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Handle: RePEc:ecb:ecbwps:20050554

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Related research
Keywords: Fixed rate tenders; rationing; equilibrium; inefficiency.;

Find related papers by JEL classification:
D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nyborg, Kjell G. & Strebulaev, Ilya A., 2001. "Collateral and short squeezing of liquidity in fixed rate tenders," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 769-792, November. [Downloadable!] (restricted)
  2. Dieter Nautz & Jörg Oechssler, 2003. "The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle," Scandinavian Journal of Economics, Blackwell Publishing, vol. 105(2), pages 207-220, 06. [Downloadable!] (restricted)
    Other versions:
  3. Swinkels, Jeroen M, 1999. "Asymptotic Efficiency for Discriminatory Private Value Auctions," Review of Economic Studies, Blackwell Publishing, vol. 66(3), pages 509-28, July. [Downloadable!] (restricted)
    Other versions:
  4. Benassy, Jean-Pascal, 1977. " On Quantity Signals and the Foundations of Effective Demand Theory," Scandinavian Journal of Economics, Blackwell Publishing, vol. 79(2), pages 147-68.
  5. 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)
    Other versions:
  6. LiCalzi, Marco & Pavan, Alessandro, 2005. "Tilting the supply schedule to enhance competition in uniform-price auctions," European Economic Review, Elsevier, vol. 49(1), pages 227-250, January. [Downloadable!] (restricted)
    Other versions:
  7. Engelbrecht-Wiggans, Richard & Kahn, Charles M., 1998. "Multi-Unit Pay-Your-Bid Auctions with Variable Awards," Games and Economic Behavior, Elsevier, vol. 23(1), pages 25-42, April. [Downloadable!] (restricted)
  8. Drazen, Allan, 1980. "Recent Developments in Macroeconomic Disequilibrium Theory," Econometrica, Econometric Society, vol. 48(2), pages 283-306, March. [Downloadable!] (restricted)
  9. von Hagen, J., 2001. "Central bank operations: auction theory and empirical evidence," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 737-741, November. [Downloadable!] (restricted)
  10. Paul Milgrom & Robert Weber, 1981. "Distributional Strategies for Games with Incomplete Information," Discussion Papers 428R, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  11. Wilson, Robert, 1979. "Auctions of Shares," The Quarterly Journal of Economics, MIT Press, vol. 93(4), pages 675-89, November. [Downloadable!] (restricted)
  12. Lawrence M. Ausubel & Peter Cramton, 1995. "Demand Reduction and Inefficiency in Multi-Unit Auctions," Papers of Peter Cramton 98wpdr, University of Maryland, Department of Economics - Peter Cramton, revised 22 Jul 2002. [Downloadable!]
  13. Back, Kerry & Zender, Jaime F., 2001. "Auctions of divisible goods with endogenous supply," Economics Letters, Elsevier, vol. 73(1), pages 29-34, October. [Downloadable!] (restricted)
  14. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(4), pages 733-64. [Downloadable!] (restricted)
  15. Ayuso, Juan & Repullo, Rafael, 2001. "Why did the banks overbid? An empirical model of the fixed rate tenders of the European Central Bank," Journal of International Money and Finance, Elsevier, vol. 20(6), pages 857-870, November. [Downloadable!] (restricted)
    Other versions:
  16. Ulrich Bindseil, 2005. "Over- and Underbidding in Central Bank Open Market Operations Conducted as Fixed Rate Tender," German Economic Review, Blackwell Publishing, vol. 6(1), pages 95-130, 02. [Downloadable!] (restricted)
  17. Damianov, Damian S., 2005. "The uniform price auction with endogenous supply," Economics Letters, Elsevier, vol. 88(2), pages 152-158, August. [Downloadable!] (restricted)
  18. Yvan Lengwiler, 1998. "The multiple unit auction with variable supply," Finance and Economics Discussion Series 1998-28, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Cassola, N. & Ewerhart , C. & Valla, N., 2006. "Declining Valuations and Equilibrium Bidding Central Bank Refinancing Operations," Documents de Travail 151, Banque de France. [Downloadable!]
  2. Bindseil, Ulrich & Nyborg, Kjell G., 2007. "Monetary policy implementation: A European Perspective," Discussion Papers 2007/10, Department of Finance and Management Science, Norwegian School of Economics and Business Administration. [Downloadable!]
  3. Christian Ewerhart & Nuno Cassola & Natacha Valla, 2006. "Declining valuations and equilibrium bidding in central bank refinancing operations," Working Paper Series 668, European Central Bank. [Downloadable!]
    Other versions:
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