The Design of the Eurosystem's Monetary Policy Instruments
by Ulrike Neyer  (Author)

About the Author
Ulrike Neyer, Department of Economics, Martin-Luther-University Halle-Wittenberg, Germany.

About this book
The creation of a single monetary currency and a single monetary policy in the euro area has faced extraordinary challenges, among them the design of suitable monetary policy instruments. This book evaluates monetary policy instruments of the Eurosystem against a number of requirements. To do so, a theoretical model framework is developed which brings together the monetary policy activities of a central bank and the liquidity management of banks considering the main characteristics and institutional features of the euro area.

Table of contents
1 Introduction
2 Monetary Policy Instruments of the Eurosystem
    2.1 Introduction
    2.2 Guiding Principles Behind the Design of the Eurosystem’s Monetary Policy Instruments
    2.3 Minimum Reserve System
    2.4 Open Market Operations
        2.4.1 Main Refinancing Operations
        2.4.2 Longer-Term Refinancing Operations, Fine-Tuning and Structural Operations
    2.5 Standing Facilities
    2.6 Summary
3 Stylized Facts and First Explanations
    3.1 The Overnight Rate
    3.2 Bidding Behaviour in the Main Refinancing Operations
        3.2.1 Observed Bidding Behaviour
        3.2.2 Interest Rate Change Expectations as a Possible Trigger for the Under- and Overbidding Behaviour
        3.2.3 Problems of the Under- and Overbidding Behaviour
        3.2.4 Reactions of the Eurosystem to the Under- and Overbidding Behaviour
    3.3 Fulfilling of Required Reserves
    3.4 Summary
4 Base Model: Banks’ Liquidity Management and Interbank Market Equilibrium
    4.1 Introduction
    4.2 Optimal Liquidity Management of a Single Bank
        4.2.1 Liquidity Costs
        4.2.2 Optimization
    4.3 Interbank Market Equilibrium
        4.3.1 Heterogeneous Banking Sector
        4.3.2 Equilibrium Interbank Market Rate
        4.3.3 Determinants of the Equilibrium Interbank Market Rate
        4.3.4 Spread Between the Interbank Market Rate and the Repo Rate
        4.3.5 Illustration
    4.4 Summary
5 Remuneration of Required Reserves at the Current Repo Rate
    5.1 Introduction
    5.2 Optimal Liquidity Management of a Single Bank
        5.2.1 Liquidity Costs
        5.2.2 Optimization Problem
        5.2.3 Optimal Liquidity Management in the Second Period
        5.2.4 Optimal Liquidity Management in the First Period
        5.2.5 Provisional Results
    5.3 Interbank Market Equilibrium and Final Results
        5.3.1 Two Banks
        5.3.2 Continuum of Banks
    5.4 Summary
6 Remuneration of Required Reserves at an Average Rate
    6.1 Introduction
    6.2 Optimal Liquidity Management of a Single Bank
        6.2.1 Liquidity Costs
        6.2.2 Optimization Problem
        6.2.3 Optimal Liquidity Management in the Second Period
        6.2.4 Optimal Liquidity Management in the First Period
        6.2.5 Provisional Results
    6.3 Interbank Market Equilibrium and Final Results
        6.3.1 Two Banks
        6.3.2 Continuum of Banks
        6.3.3 Rationing
    6.4 Summary
7 Overlapping Maturities of Central Bank Credits
    7.1 Introduction
    7.2 Optimal Liquidity Management of a Single Bank
        7.2.1 Liquidity Costs
        7.2.2 Optimization Problem
        7.2.3 Optimal Liquidity Management in the Second Period
        7.2.4 Optimal Liquidity Management in the First Period
        7.2.5 Provisional Results
    7.3 Equilibrium in the Interbank Market and Final Results
        7.3.1 Two Banks
        7.3.2 Continuum of Banks
        7.3.3 Expiring Central Bank Credits within the Reserve Maintenance Period
        7.3.4 Rationing
    7.4 Summary
8 Implications for the Eurosystem’s Operational Framework
    8.1 Interbank Market Rate
    8.2 Current Rate Model: Fulfils Requirements Most Closely
    8.3 Evaluation of the Changes to the Eurosystem’s Operational Framework
    8.4 Suggestions for Further Improvements to the Eurosystem’s Operational Framework
    8.5 Summary
9 Summary

Series: Contributions to Economics
Length: 179 pages
Publisher: Physica; 2007 edition (November 14, 2007)
Language: English
ISBN-10: 3790819778
ISBN-13: 978-0397510252