Research Discussion Papers, Bank of Finland
No 8/2001:
Fixed rate tenders and the overnight money market equilibrium
Tuomas Välimäki ()
Abstract: This paper presents a general equilibrium model of the
determination of equilibrium in the interbank market for overnight
liquidity when the central bank uses fixed rate tenders in its liquidity
provision. We consider three alternative liquidity policy rules. First, the
central bank may provide the bid amounts in full. Alternatively, the
central bank can scale back the bid amounts pro rata with the individual
bids. For the latter case, we consider two target options for the central
bank: liquidity or an interest rate. We show that the expected overnight
rate remains more tightly in the hands of the central bank if the full
allotment procedure or a pure interest rate targeting rule is used than if
liquidity targeting is used. We will also demonstrate how optimal bidding
in tender operations varies considerably according to which procedure is
chosen by the central bank.
Keywords: money market tenders; overnight rate of interest; averaging; central bank operational framework; (follow links to similar papers)
75 pages, May 23, 2001
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