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

CEMFI Working Paper No. 0011

36 Pages Posted: 25 Jan 2001

See all articles by Juan Ayuso

Juan Ayuso

Banco de España

Rafael Repullo

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: September 2000


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.

Keywords: European Central Bank, monetary policy instruments, open market operations, tender procedures, monetary auctions

JEL Classification: E52, E58, D44

Suggested Citation

Ayuso, Juan and Repullo, Rafael, A Model of the Open Market Operations of the European Central Bank (September 2000). CEMFI Working Paper No. 0011, Available at SSRN: https://ssrn.com/abstract=257592 or http://dx.doi.org/10.2139/ssrn.257592

Juan Ayuso

Banco de España ( email )

Alcala 50
Servicio de Estudios
28014 Madrid
+34 91 338 5735 (Phone)
+34 91 338 5624 (Fax)

Rafael Repullo (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
+34 91429 0551 (Phone)
+34 91429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~repullo/

Centre for Economic Policy Research (CEPR)

United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

HOME PAGE: http://www.ecgi.org

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics