IDEAS home Printed from https://ideas.repec.org/p/cmf/wpaper/wp2000_0011.html

A Model of the Open Market Operations of the European Central Bank

Author

Listed:
  • Juan Ayuso
  • Rafael Repullo

Abstract

We construct a model to analyze the two types of tender procedures used by the European Central Bank (ECB) in its open market operations. We assume that the ECB minimizes the expected value of a loss function that depends on the quadratic difference between the interbank rate and a target interest rate that characterizes the stance of monetary policy. We show that when the loss function penalizes more heavily interbank rates below the target, fixed rate tenders have a unique equilibrium characterized by extreme overbidding. We also show that variable rate tenders have multiple equilibria characterized by varying degrees of overbidding, and that in these tenders an equilibrium without overbidding can be obtained by preannouncing the intended liquidity injection. Finally, our empirical analysis supports the assumption of an asymmetric loss function for the ECB.

Suggested Citation

  • Juan Ayuso & Rafael Repullo, 2000. "A Model of the Open Market Operations of the European Central Bank," Working Papers wp2000_0011, CEMFI.
    • Handle: RePEc:cmf:wpaper:wp2000_0011
    as

    Download full text from publisher

    File URL: https://www.cemfi.es/ftp/wp/0011.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cmf:wpaper:wp2000_0011. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Araceli Requerey (email available below). General contact details of provider: https://edirc.repec.org/data/cemfies.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.