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Using money market rates to assess the alternatives of fixed vs. variable rate tenders: the lesson from 1989-1998 data for Germany

  • Manna, Michele

This paper uses the variability of money market rates to compare the conduct of the central bank's key market operation as a fixed-rate tender (FRT) or a variable-rate tender (VRT). Nowadays, leading central banks generally use FRTs or other approaches (e.g. target rates) which yield step changes in the policy rate, as opposed to the more piecemeal, but also more noisy changes resulting from the VRT rate. Given the central bankers' preference for stable money market conditions, FRTs should thus remain associated with lower market variability. In fact, daily data for the German overnight and three-month rates from 1989 to 1998, when the Bundesbank alternated FRTs and VRTs, indicate that the average variability of money market rates is broadly the same under the two tender procedures. A small model shows that this finding holds true under rather general conditions, and is not only a feature of the experience in Germany. JEL Classification: E4, E5, G2, N2

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Paper provided by European Central Bank in its series Working Paper Series with number 0186.

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Date of creation: Oct 2002
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Handle: RePEc:ecb:ecbwps:20020186
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  1. 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.
  2. Pérez Quirós, Gabriel & Rodríguez Mendizábal, Hugo, 2001. "The daily market for funds in Europe: Has something changed with the EMU?," Working Paper Series 0067, European Central Bank.
  3. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
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  5. Courtenay, Roger & Clare, Andrew, 2001. "What can we learn about monetary policy transparency from financial market data?," Discussion Paper Series 1: Economic Studies 2001,06, Deutsche Bundesbank, Research Centre.
  6. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
  7. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
  8. Campbell, John, 1987. "Money Announcements, The Demand for Bank Reserves, and the Behavior of the Federal Funds Rate within the Statement Week," Scholarly Articles 3220231, Harvard University Department of Economics.
  9. Nautz, Dieter, 1997. "How Auctions Reveal Information: A Case Study on German REPO Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 17-25, February.
  10. Marvin Goodfriend, 1985. "Monetary mystique : secrecy and central banking," Working Paper 85-07, Federal Reserve Bank of Richmond.
  11. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.
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