This paper analyzes the two types of tenders used by the European Central Bank (ECB) in its open market operations. We assume that the ECB minimizes the expected value of a loss function that depends on the quadratic di¤erence between the interbank rate and a target rate that characterizes the stance of monetary policy. We show that when the loss function penalizes more heavily interbank rates below the target, …xed rate tenders have a unique equilibrium with extreme overbidding, while variable rate tenders have multiple equilibria with varying degrees of overbidding. We also show that in the latter an equilibrium without overbidding can be obtained by preannouncing the intended liquidity injection. Our empirical analysis supports the assumption of an asymmetric loss function for the ECB
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