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Fixed rate tenders and the overnight money market equilibrium

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  • Välimäki, Tuomas

    ()
    (Bank of Finland)

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    Abstract

    This paper presents a general equilibrium model of the determination of equilibrium in the interbank market for overnight liquidity when the central bank uses fixed rate tenders in its liquidity provision. We consider three alternative liquidity policy rules. First, the central bank may provide the bid amounts in full. Alternatively, the central bank can scale back the bid amounts pro rata with the individual bids. For the latter case, we consider two target options for the central bank: liquidity or an interest rate. We show that the expected overnight rate remains more tightly in the hands of the central bank if the full allotment procedure or a pure interest rate targeting rule is used than if liquidity targeting is used. We will also demonstrate how optimal bidding in tender operations varies considerably according to which procedure is chosen by the central bank.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0108.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 8/2001.

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    Length: 75 pages
    Date of creation: 23 May 2001
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2001_008

    Contact details of provider:
    Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
    Web page: http://www.suomenpankki.fi/en/
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    Related research

    Keywords: money market tenders; overnight rate of interest; averaging; central bank operational framework;

    References

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    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.:
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    1. Ayuso, Juan & Repullo, Rafael, 2000. "A Model of the Open Market Operations of the European Central Bank," CEPR Discussion Papers 2605, C.E.P.R. Discussion Papers.
    2. Alessandro Prati & Giuseppe Bertola & Leonardo Bartolini, 2000. "Day-To-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," IMF Working Papers 00/206, International Monetary Fund.
    3. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The daily market for funds in Europe: Has something changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra.
    4. Craig Furfine, 1998. "Interbank payments and the daily federal funds rate," Finance and Economics Discussion Series 1998-31, Board of Governors of the Federal Reserve System (U.S.).
    5. 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.
    6. Juan Ayuso & Rafael Repullo, 2000. "A Model of the Open Market Operations of the European Central Bank," Banco de Espa�a Working Papers 0016, Banco de Espa�a.
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    Citations

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    Cited by:
    1. Bindseil, Ulrich & Camba-Méndez, Gonzalo & Hirsch, Astrid & Weller, Benedict, 2004. "Excess reserves and implementation of monetary policy of the ECB," Working Paper Series 0361, European Central Bank.
    2. Bindseil, Ulrich & Camba-Mendez, Gonzalo & Hirsch, Astrid & Weller, Benedict, 2006. "Excess reserves and the implementation of monetary policy of the ECB," Journal of Policy Modeling, Elsevier, vol. 28(5), pages 491-510, July.
    3. Välimäki, Tuomas, 2002. "Variable rate liquidity tenders," Research Discussion Papers 24/2002, Bank of Finland.
    4. Jens Tapking, 2004. "Multiple equilibrium overnight rates in a dynamic interbank market game," Finance 0409042, EconWPA.
    5. tuomas välimäki, 2004. "Variable rate liquidity tenders," Macroeconomics 0405010, EconWPA.
    6. Cassola, Nuno & Morana, Claudio, 2003. "Volatility of interest rates in the euro area: evidence from high frequency data," Working Paper Series 0235, European Central Bank.

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