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A model of the Eurosystem's operational framework for monetary policy implementation

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  • Ewerhart, Christian

Abstract

This paper offers a game theoretic model of liquidity provision through repeated central bank tenders, in the spirit of the operational framework of the Eurosystem. Banks are required to satisfy reserve requirements subject to an averaging provision over individual maintenance periods, and transactions may hang over into the respective subsequent period. It is shown that liquidity shocks are absorbed by the system by exponentially declining oscillations around the stationary equilibrium. When a policy rate cut is expected, bidders strategically reduce demand prior to the decision, which may unbalance the system. The anticipation of strategic behavior may generate an oscillation even before the maintenance period in which the decision is expected. When the recently released ECB proposal is implemented in the model, then the bidders' strategic motives are effectively eliminated. It is shown that, alternatively, bidding behavior can be corrected using a simple reimbursement scheme. JEL Classification: E51, G28

Suggested Citation

  • Ewerhart, Christian, 2002. "A model of the Eurosystem's operational framework for monetary policy implementation," Working Paper Series 197, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2002197
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, 2007. "Manipulation in Money Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 113-148, March.
    2. Bucher, Monika & Hauck, Achim & Neyer, Ulrike, 2014. "Frictions in the interbank market and uncertain liquidity needs: Implications for monetary policy implementation," DICE Discussion Papers 134, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    3. Nuno Cassola & Claudio Morana, 2006. "Volatility of interest rates in the euro area: Evidence from high frequency data," The European Journal of Finance, Taylor & Francis Journals, vol. 12(6-7), pages 513-528.
    4. Linzert, Tobias & Schmidt, Sandra, 2007. "What Explains the Spread Between the Euro Overnight Rate and the ECB's Policy Rate?," ZEW Discussion Papers 07-076, ZEW - Leibniz Centre for European Economic Research.
    5. William C. Whitesell, 2003. "Tunnels and reserves in monetary policy implementation," Finance and Economics Discussion Series 2003-28, Board of Governors of the Federal Reserve System (U.S.).
    6. Cassola, Nuno & Ejerskov, Steen & Ewerhart, Christian & Valla, Natacha, 2003. "Optimal allotment policy in the Eurosystem's main refinancing operations," Working Paper Series 295, European Central Bank.
    7. Monika Bucher & Achim Hauck & Ulrike Neyer, 2020. "Interbank market friction-induced holdings of precautionary liquidity: implications for bank loan supply and monetary policy implementation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(1), pages 165-222, July.
    8. Giuseppe Bruno & Ernesto Maurizio Ordine & Antonio Scalia, 2005. "Banks� participation in the Eurosystem auctions and money market integration," Temi di discussione (Economic working papers) 562, Bank of Italy, Economic Research and International Relations Area.
    9. Moschitz, Julius, 2004. "The determinants of the overnight interest rate in the euro area," Working Paper Series 393, European Central Bank.
    10. Cinzia Alcidi & Francesco Corti & Daniel Gros, 2022. "A Golden Rule for Social Investments: How to Do It," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 57(1), pages 26-32, January.
    11. Ulrike Neyer & Jürgen Wiemers, 2004. "The Influence of a Heterogeneous Banking Sector on the Interbank Market Rate in the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 395-428, September.
    12. Ulrich Bindseil, 2005. "Over‐ and Underbidding in Central Bank Open Market Operations Conducted as Fixed Rate Tender," German Economic Review, Verein für Socialpolitik, vol. 6(1), pages 95-130, February.
    13. Linzert, Tobias & Schmidt, Sandra, 2008. "What explains the spread between the euro overnight rate and the ECB's policy rate?," Working Paper Series 983, European Central Bank.

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    More about this item

    Keywords

    euro; monetary policy instruments; money market; operational framework; refinancing operations; reserve requirements; underbidding; volatility;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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