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Variable rate liquidity tenders

Author

Listed:
  • tuomas välimäki

    (Bank of Finland)

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.

Suggested Citation

  • tuomas välimäki, 2004. "Variable rate liquidity tenders," Macroeconomics 0405010, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpma:0405010
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    References listed on IDEAS

    as
    1. 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.
    2. Bindseil, Ulrich & Nyborg, Kjell G. & Strebulaev, Ilya A., 2002. "Bidding and performance in repo auctions: evidence from ECB open market operations," Working Paper Series 157, European Central Bank.
    3. Bindseil, Ulrich, 2002. "Equilibrium bidding in the Eurosystem's open market operations," Working Paper Series 137, European Central Bank.
    4. Back, Kerry & Zender, Jaime F., 2001. "Auctions of divisible goods with endogenous supply," Economics Letters, Elsevier, vol. 73(1), pages 29-34, October.
    5. Prati, Alessandro & Bartolini, Leonardo & Bertola, Giuseppe, 2003. "The overnight interbank market: Evidence from the G-7 and the Euro zone," Journal of Banking & Finance, Elsevier, vol. 27(10), pages 2045-2083, October.
    6. Back, Kerry & Zender, Jaime F, 1993. "Auctions of Divisible Goods: On the Rationale for the Treasury Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 6(4), pages 733-764.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    money market tenders; liquidity policy; bidding; central bank operational framework;
    All these keywords.

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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