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The minimum liquidity deficit and the maturity structure of central banks' open market operations: lessons from the financial crisis

Author

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  • Eisenschmidt, Jens
  • Holthausen, Cornelia

Abstract

This paper studies the relationship between the size of the banking sector’s refinancing needs vis-à-vis the central bank and auction rates in its open market operations in times of financial market stress. In a theoretical model, it is found that marginal rates at central bank auctions may increase if the share of troubled banks becomes too high relative to the total size of the banking sector’s refinancing needs. An empirical analysis then aims at determining the size of open market operations needed to absorb large stress levels in interbank money markets and hence contain central bank auction rates. Finally, the paper analyses effects of the composition of open market operations of different maturities on auction rates. It is found that a too high share of longer-term refinancing induces a rise in auction rates which is undesirable. Therefore, the analysis suggests that there is a lower bound for the amount of liquidity provided through short-term operations. JEL Classification: G01, G10, G21

Suggested Citation

  • Eisenschmidt, Jens & Holthausen, Cornelia, 2010. "The minimum liquidity deficit and the maturity structure of central banks' open market operations: lessons from the financial crisis," Working Paper Series 1282, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20101282
    Note: 2696070
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1282.pdf
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    Cited by:

    1. Vergote, Olivier & Sugo, Tomohiro, 2020. "Who takes the ECB’s targeted funding?," Working Paper Series 2439, European Central Bank.
    2. Kiss, Gábor Dávid & Kosztopulosz, Andreász, 2012. "The impact of the crisis on the monetary autonomy of Central and Eastern European countries," Public Finance Quarterly, Corvinus University of Budapest, vol. 57(1), pages 28-52.

    More about this item

    Keywords

    central bank; financial crisis; money market; open market operations;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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