Research Discussion Papers, Bank of Finland
Why the marginal MRO rate exceeds the ECB policy rate?
Abstract: In the Eurosystem, banks’ interest rate expectations
should no longer have resulted in a non-zero tender spread, the difference
between marginal and minimum price for liquidity, when the ECB reformed its
op-erational framework for monetary policy implementation in March 2004 so
that the policy rates remain constant within reserves maintenance periods.
Yet, the tender spread was wider in 2005 than in any single year after
2000, when the ECB switched from fixed to variable rate tenders. Parts of
the relevant literature have argued that because of the ECB’s asymmetric
preferences over deviations of the market rates up and down from the policy
rate, the shortest euro interest rates persistently exceed the policy rate
This paper argues, however, that when the central bank applies a quantity
oriented liquidity policy, a positive tender spread may result from money
market inefficiencies and banks’ risk aversion even if the central bank
preferences are symmetric and the markets do not anticipate any changes in
the policy rates. In such a case, the driving force behind the tender
spread is banks’ uncertainty about their individual allotments at the
marginal rate for the Eurosystem main refinancing operations (MROs).
Furthermore, the allotment uncertainty is shown to be significantly related
to the amount of liquidity supplied in each operation. Hence, the expansion
in the MRO volumes experienced since 2002 may have had a major contribution
to the emergence and observed growth of the tender spread.
Keywords: main refinancing operations; liquidity; tender spread; allotments; (follow links to similar papers)
JEL-Codes: D44; E58; (follow links to similar papers)
39 pages, October 3, 2006
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