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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

Suggested Citation

  • Manna, Michele, 2002. "Using money market rates to assess the alternatives of fixed vs. variable rate tenders: the lesson from 1989-1998 data for Germany," Working Paper Series 0186, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20020186

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    References listed on IDEAS

    1. 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.
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    3. Campbell, John Y, 1987. "Money Announcements, the Demand for Bank Reserves, and the Behavior of the Federal Funds Rate within the Statement Week," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(1), pages 56-67, February.
    4. 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.
    5. Bernanke, Ben S. & Mihov, Ilian, 1997. "What does the Bundesbank target?," European Economic Review, Elsevier, vol. 41(6), pages 1025-1053, June.
    6. 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.
    7. Claudio E. V. Borio, 1997. "Monetary policy operating procedures in industrial countries," BIS Working Papers 40, Bank for International Settlements.
    8. 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.
    9. Bindseil, Ulrich & Seitz, Franz, 2001. "The supply and demand for Eurosystem deposits - The first 18 months," Working Paper Series 0044, European Central Bank.
    10. Alan S. Blinder, 1999. "Central Banking in Theory and Practice," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262522608, January.
    11. Guthrie, Graeme & Wright, Julian, 2000. "Open mouth operations," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 489-516, October.
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    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G2 - Financial Economics - - Financial Institutions and Services
    • N2 - Economic History - - Financial Markets and Institutions


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