Optimal Allotment Policy in the Eurosystem's Main Refinancing Operations

49 Pages Posted: 10 Feb 2004

See all articles by Christian Ewerhart

Christian Ewerhart

University of Zurich, Department of Economics

Nuno Cassola

University of Milan Bicocca - CefES; University of Lisbon - CEMAPRE

Steen Ejerskov

European Central Bank (ECB)

Natacha Valla

European Union - European Investment Bank; European Central Bank (ECB); Banque de France

Date Written: December 2003

Abstract

On several occasions during the period 2001-2003, the European Central Bank (ECB) decided to deviate from its "neutral" benchmark allotment rule, with the effect of not alleviating a temporary liquidity shortage in the banking system. This is remarkable because it implied the possibility of short-term interest rates raising significantly above the main policy rate. In the present paper, we show that when the monetary authority cares for both liquidity and interest rate conditions, the optimal allotment policy may entail a discontinuous reaction to initial conditions. More precisely, we prove that there is a threshold level for the accumulated aggregate liquidity position in the banking system prior to the last operation in a given maintenance period, so that the benchmark allotment is optimal whenever liquidity conditions are above the threshold, and a tight allotment is optimal whenever liquidity conditions are below the threshold.

Keywords: Euro, monetary policy instruments, operational framework, refinancing operations

JEL Classification: E43, E52

Suggested Citation

Ewerhart, Christian and Cassola, Nuno and Ejerskov, Steen and Valla, Natacha, Optimal Allotment Policy in the Eurosystem's Main Refinancing Operations (December 2003). Available at SSRN: https://ssrn.com/abstract=487475

Christian Ewerhart (Contact Author)

University of Zurich, Department of Economics ( email )

Schoenberggasse 1
Zurich, CH-8001
Switzerland

Nuno Cassola

University of Milan Bicocca - CefES ( email )

Milan
Italy

University of Lisbon - CEMAPRE ( email )

Lisbon
Portugal

Steen Ejerskov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Natacha Valla

European Union - European Investment Bank ( email )

98-100 Boulevard Konrad Adenauer
L-2950
Luxembourg

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 13440 (Phone)

Banque de France ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01
France
+33 1 42922756 (Phone)
+33 1 42926296 (Fax)

HOME PAGE: http://www.iue.it/Personal/Researchers/valla/

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