Research Discussion Papers, Bank of Finland
No 1/2002:
Bidding in fixed rate tenders: theory and experience with the ECB tenders
Tuomas Välimäki ()
Abstract: This paper presents a model of the optimal bidding
behaviour of a single bank in the context of fixed rate liquidity tenders.
Banks’ bidding is shown to depend crucially on the central bank’s liquidity
policy as regards tender allotments. The paper also analyses ECB liquidity
policy in terms of the model. The ECB, while applying fixed rate tenders,
appears to have been attempting stabilise the market interest rate at a
level close to the main refinancing rate. However, this aim was at least
partially overridden by that of stabilising total money market liquidity
over the course of the reserve maintenance period – even more so when banks
were expecting the ECB to raise the main refinancing rate in the near
future. The banks’ aggregate bids increased considerably during the period
of fixed rate tenders. This was seen to result mainly from profit
opportunities associated with a positive spread between market interest
rate and main refinancing rate. The positive spread resulted from the
combination of expectations of an interest rate hike and liquidity-oriented
allotment policy.
Keywords: bidding; money market tenders; liquidity policy; central bank operating framework; (follow links to similar papers)
JEL-Codes: E43; E58; G21; (follow links to similar papers)
48 pages, February 18, 2002
Before downloading any of the electronic versions below
you should read our statement on
copyright.
Download GhostScript
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
0201.pdf 
Download Statistics
Questions (including download problems) about the papers in this series should be directed to Minna Nyman ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Programing by
Design by Joachim Ekebom
