Equilibrium and Inefficiency in Fixed Rate Tenders

35 Pages Posted: 30 Nov 2005

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

Natacha Valla

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

Date Written: November 2005

Abstract

The fixed rate tender is one of the main procedural formats relied upon by central banks in their implementation of monetary policy. This fact stands in a somewhat puzzling contrast to the prevalent view in the theoretical literature that the procedure, by fixing interest rate and quantity at the same time, does not allow a strategic equilibrium. We show that an equilibrium exists under general conditions even if bidders expect true demand to exceed supply on average. The outcome is typically inefficient. It is argued that the fixed rate tender, in comparison to other tender formats, may be an appropriate instrument for central bank liquidity management when market conditions are sufficiently calm.

Keywords: Fixed rate tenders, rationing, equilibrium, inefficiency

JEL Classification: D44, E52

Suggested Citation

Ewerhart, Christian and Cassola, Nuno and Valla, Natacha, Equilibrium and Inefficiency in Fixed Rate Tenders (November 2005). ECB Working Paper No. 554, Available at SSRN: https://ssrn.com/abstract=850226

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

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/

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

Paper statistics

Downloads
50
Abstract Views
901
PlumX Metrics