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The Repo Auctions of the European Central Bank and the Vanishing Quota Puzzle *
Author(s) -
Nautz Dieter,
Oechssler Jörg
Publication year - 2003
Publication title -
scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/1467-9442.t01-1-00005
Subject(s) - call for bids , economics , common value auction , stylized fact , fixed interest rate loan , monetary economics , interest rate , market liquidity , variable (mathematics) , monetary policy , microeconomics , procurement , keynesian economics , mathematics , management , mathematical analysis
Until June 2000 the European Central Bank (ECB) used fixed rate tenders for its weekly repo auctions. A switch to variable rate tenders became necessary due to massive overbidding by banks. In this paper we introduce a stylized game among banks to investigate this overbidding phenomenon. Our results confirm the weakness of the fixed rate tender format and indicate that the ECB's liquidity management has significantly improved since the switch to the variable rate system. Yet recent episodes of rate cut expectations suggest that the ECB's practice of setting a minimum bid rate should be abandoned in favor of a more symmetric interest rate target.