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Variable rate liquidity tenders

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  • Välimäki, Tuomas

    ()
    (Bank of Finland Research)

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    Abstract

    This paper constructs an equilibrium model for the short-term money market, when the central bank provides liquidity via variable rate tenders. The relation between market rate of interest and liquidity is derived from a single bank’s profit maximisation problem in the interbank market, and the CB determines its liquidity provision by minimising a quadratic loss function that contains both deviations of expected market rate from CB target rate and differences between liquidity supply and target liquidity. We model equilibrium bid behaviour in the tenders and explain the underbidding phenomenon resulting from the minimum bid rate. We also show that, when maturities of consecutive operations overlap, the expected market interest rate will rise above the CB’s target whenever a target rate change (hike or cut) is expected to occur in the same reserve maintenance period. Finally, we review the data from the ECB variable rate tenders and find that the ECB has been fairly liquidity oriented in its allotment decisions.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0224.pdf
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    Bibliographic Info

    Paper provided by Bank of Finland in its series Research Discussion Papers with number 24/2002.

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    Length: 50 pages
    Date of creation: 30 Sep 2002
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2002_024

    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; liquidity policy; bidding; central bank operational framework;

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    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. Bindseil, Ulrich & Nyborg, Kjell G. & Strebulaev, Ilya A., 2005. "Bidding and Performance in Repo Auctions: Evidence from ECB Open Market Operations," Discussion Papers 2005/13, Department of Business and Management Science, Norwegian School of Economics.
    2. repec:fth:bfdipa:8/2001 is not listed on IDEAS
    3. Ayuso, J. & Repullo, R., 2000. "A Model of the Open Market Operations of the European Central Bank," Papers 0011, Centro de Estudios Monetarios Y Financieros-.
    4. Alessandro Prati & Leonardo Bartolini & Giuseppe Bertola, 2001. "The overnight interbank market: evidence from the G-7 and the Euro zone," Staff Reports 135, Federal Reserve Bank of New York.
    5. Bindseil, Ulrich, 2002. "Equilibrium bidding in the Eurosystem's open market operations," Working Paper Series 0137, European Central Bank.
    6. Back, Kerry & Zender, Jaime F., 2001. "Auctions of divisible goods with endogenous supply," Economics Letters, Elsevier, vol. 73(1), pages 29-34, October.
    7. 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.
    8. Välimäki, Tuomas, 2001. "Fixed rate tenders and the overnight money market equilibrium," Research Discussion Papers 8/2001, Bank of Finland.
    9. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-64.
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    Citations

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    Cited by:
    1. Gianfranco A. Vento, 2004. "The Eurosystem operational framework, use of colleteral and liquidity distribution in the euro area: towards a single interbank market?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 57(228), pages 71-100.
    2. Gianfranco A. Vento, 2004. "The Eurosystem operational framework, use of colleteral and liquidity distribution in the euro area: towards a single interbank market?," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 57(228), pages 71-100.

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