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

20 Pages Posted: 3 Oct 2003

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)

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Abstract

We model the two types of tenders used by the European Central Bank in its open market operations. We assume that the ECB minimises a loss function that depends on the difference between the interbank rate and a target rate that characterises the stance of monetary policy. When the loss function penalises interbank rates below the target more heavily, fixed rate tenders have a unique equilibrium with high overbidding, while variable rate tenders have multiple equilibria with moderate overbidding. Our empirical analysis is consistent with the predictions of the model and supports the hypothesis of an asymmetric loss function.

Suggested Citation

Ayuso, Juan and Repullo, Rafael, A Model of the Open Market Operations of the European Central Bank. Economic Journal, Vol. 113, pp. 883-902, October 2003. Available at SSRN: https://ssrn.com/abstract=452766

Juan Ayuso (Contact Author)

Banco de España ( email )

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

Rafael Repullo

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

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

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

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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

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