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Type | Working Paper |
Scope | Discipline-based scholarship |
Title | Optimal Allotment Policy in Central Bank Open Market Operations |
Organization Unit | |
Authors |
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Language |
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Institution | University of Zurich |
Series Name | Working paper series / Institute for Empirical Research in Economics |
Number | No. 201 |
ISSN | 1424-0459 |
Date | 2004 |
Abstract Text | "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 ofnliquidity 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 banknwill 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." |
Official URL | http://www.econ.uzh.ch/wp.html |
PDF File | Download from ZORA |
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