Central bank tenders: three essays on money market liquidity auctions
AbstractMost OECD central banks implement monetary policy by supplying reserves to the banking sector with the aim of influencing short-term interbank interest rates. To interpret the monetary policy stance accurately, one needs to be familiar with the mechanism for determining the money market equilibrium. The aim of this study is to deepen our understanding of the various effects of different intervention styles on the short-term money market when monetary policy is implemented with an operational framework similar to that of the European Central Bank (ECB). In the first essay of this study, we model banks' demand for central bank reserves (liquidity) for each day of an n-day reserve maintenance period and analyse liquidity determination under alternative liquidity policy rules that a central bank might apply in fixed rate tenders. It is shown that there is a tradeoff between the central bank's ability to keep a market interest rate close to the tender rate and the stability of liquidity holdings within a maintenance period. The second essay presents a model of a single bank's optimal bidding in the context of fixed rate liquidity tenders. It is shown that banks' bidding crucially depends on the central bank's liquidity policy for tender allotments. This essay also analyses ECB liquidity policy in terms of the model. The final essay models the money market equilibrium and analyses banks' bidding when the central bank uses variable rate tenders. The liquidity supply is fully endogenised by having the central bank minimise a loss function the includes deviations-from-target of interest rate and liquidity. ECB experiences with variable rate tenders are also studied in this essay.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Finland in its series Scientific Monographs with number E:26/2003.
Length: 235 pages
Date of creation: 25 Apr 2003
Date of revision:
central bank operational framework; short-term interest rates; money markets; tenders; liquidity policy; bidding;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Ewerhart, Christian & Cassola, Nuno & Valla, Natacha, 2010.
"Declining valuations and equilibrium bidding in central bank refinancing operations,"
International Journal of Industrial Organization,
Elsevier, vol. 28(1), pages 30-43, January.
- Christian Ewerhart & Nuno Cassola & Natacha Valla, 2007. "Declining Valuations And Equilibrium Bidding In Central Bank Refinancing Operations," Swiss Finance Institute Research Paper Series 07-22, Swiss Finance Institute.
- Ewerhart, Christian & Cassola, Nuno & Valla, Natacha, 2006. "Declining valuations and equilibrium bidding in central bank refinancing operations," Working Paper Series 0668, European Central Bank.
- Sébastien Kraenzlin, 2007. "The characteristics and development of the Swiss franc repurchase agreement market," Financial Markets and Portfolio Management, Springer, vol. 21(2), pages 241-261, June.
- Bindseil, Ulrich & Nyborg, Kjell G., 2007. "Monetary policy implementation: A European Perspective," Discussion Papers 2007/10, Department of Business and Management Science, Norwegian School of Economics.
- Alain Durré & Stefano Nardelli, 2008. "Volatility in the Euro area money market: effects from the monetary policy operational framework," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 307-322.
- Toporowski , Jan, 2006. "Open market operations: beyond the new consensus," Research Discussion Papers 14/2006, Bank of Finland.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman) or (Päivi Määttä).
If references are entirely missing, you can add them using this form.