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Optimal allotment policy in central bank open market operations


Ewerhart, Christian; Cassola, Nuno; Ejerskov, Steen; Valla, Natacha (2009). Optimal allotment policy in central bank open market operations. European Journal of Finance, 15(4):405-420.

Abstract

This paper derives a central bank's optimal liquidity supply towards a money market with an unrestricted lending facility. We show that when the effect of liquidity on market rates is not too small, and the monetary authority cares for both interest rates and liquidity conditions, then the optimal allotment policy may entail a discontinuous
reaction to initial conditions. In particular, the model predicts a threshold level of liquidity below which the central bank will not bail out the banking system. An
estimation of the liquidity effect for the euro area suggests that the discontinuity might have contributed to the Eurosystem's tight response to occurrences of underbidding during the period June 2000 through March 2004.

Abstract

This paper derives a central bank's optimal liquidity supply towards a money market with an unrestricted lending facility. We show that when the effect of liquidity on market rates is not too small, and the monetary authority cares for both interest rates and liquidity conditions, then the optimal allotment policy may entail a discontinuous
reaction to initial conditions. In particular, the model predicts a threshold level of liquidity below which the central bank will not bail out the banking system. An
estimation of the liquidity effect for the euro area suggests that the discontinuity might have contributed to the Eurosystem's tight response to occurrences of underbidding during the period June 2000 through March 2004.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Economics
Dewey Decimal Classification:330 Economics
Language:English
Date:June 2009
Deposited On:22 Jan 2010 13:59
Last Modified:05 Apr 2016 13:31
Publisher:Taylor & Francis
ISSN:1351-847X
Additional Information:"This is an electronic version of an article published in [Optimal allotment policy in central bank open market operations Authors: Christian Ewerhart; Nuno Cassola; Steen Ejerskov; Natacha Valla. The European Journal of Finance, Volume 15, Issue 4 June 2009 , pages 405 - 420. European Journal of Finance is available online at: http://www.informaworld.com/smpp/content~db=all?content=10.1080/13518470802560857&waited=0" Es existiert eine ECB-Version unter folgendem link: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp295.pdf
Publisher DOI:https://doi.org/10.1080/13518470802560857

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