A model of the Eurosystem's operational framework for monetary policy implementation

This paper offers a game theoretic model of liquidity provision through repeated central bank tenders, in the spirit of the operational framework of the Eurosystem. Banks are required to satisfy reserve requirements subject to an averaging provision over individual maintenance periods, and transactions may hang over into the respective subsequent period. It is shown that liquidity shocks are absorbed by the system by exponentially declining oscillations around the stationary equilibrium. When a policy rate cut is expected, bidders strategically reduce demand prior to the decision, which may unbalance the system. The anticipation of strategic behavior may generate an oscillation even before the maintenance period in which the decision is expected. When the recently released ECB proposal is implemented in the model, then the bidders' strategic motives are effectively eliminated. It is shown that, alternatively, bidding behavior can be corrected using a simple reimbursement scheme. JEL Classification: E51, G28

The German UMTS Design: Insights From Multi-Object Auction Theory

We briefly survey several insights about value and revenue maximization in multi-object auctions and apply them to the German (and Austrian) UMTS auction. In particular, we discuss in detail the exposure problem that caused firms in Germany to pay almost Euro 20 billion for nothing.

Monotone comparative statics with separable objective functions

The Milgrom-Shannon single crossing property is essential for monotone comparative statics of optimization problems and noncooperative games. This paper formulates conditions for an additively separable objective function to satisfy the single crossing property. One component of the objective function is assumed to allow a monotone concave transformation with increasing differences, and to be nondecreasing in the parameter variable. The other component is assumed to exhibit increasing differences, and to be nonincreasing in the choice variable. As an application, I prove existence of an isotone pure strategy Nash equilibrium in a Cournot duopoly with logconcave demand, affiliated types, and nondecreasing costs

Repo markets, counterparty risk and the 2007/2008 liquidity crisis

A standard repurchase agreement between two counterparties is considered to examine the endogenous choice of collateral assets, the feasibility of secured lending, and welfare implications of the central bank’s collateral framework. As an important innovation, we allow for two-sided counterparty risk. Our findings relate to empirical characteristics of repo transactions and have an immediate bearing on market developments since August 2007. JEL Classification: G21, G32, E51collateral, Counterparty risk, haircuts, liquidity, repurchase agreements

A Stylized Model of the German UMTS Auction

This paper discusses some economic aspects of the recent German and Austrian UMTS license auctions. We consider a stylized model of the open ascending auction with incomplete information and market externalities. It is shown that, if the dominant incumbent is not successful in pushing the weakest entrant out of the market, he will face ex-post spurious price increments. We argue that this feature of the German auction design caused a significant risk for the bidding firms. In particular, being aware of these risks, an incumbent may be willing to accommodate the entrant earlier than what one would expect from the valuations alone. We compare our predictions with the observed outcomes.

Cournot Oligopoly and Concavo-Concave Demand

The N-firm Cournot model with general technologies is reviewed to derive generalized and unified conditions for existence of a pure strategy Nash equilibrium. Tight conditions are formulated alternatively (i) in terms of concavity of two-sided transforms of inverse demand, or (ii) as linear constraintsnon the elasticities of inverse demand and its first derivative. These conditions hold, in particular, if a firm’s marginal revenue decreases in other firms’ aggregate output, or if inverse demand is logconcave. The analysis relies on lattice-theoretic methods, engaging both cardinal and ordinal notions of supermodularity. As a byproduct, a powerful test for strict quasiconcavitynis obtained

The German UMTS Design: Insights From Multi-Object Auction Theory

We briefly survey several insights about value and revenue maximization in multi-object auctions and apply them to the German (and Austrian) UMTS auction. In particular, we discuss in detail the exposure probelm that caused firms in Germany to pay almost Euro 20 billion for nothing.

Structural Econometric Approach to Bidding in the Main refinancing Operations of the Eurosystem

This paper contributes to the existing literature on central bank repo auctions. It is based on a structural econometric approach, whereby the primitives of bidding behavior (individual bid schedules and bid-shading components) are directly estimated. With the estimated parameters we calibrate a theoretical model in order to illustrate some comparative static results. This exercise sheds light on the debate about the reversed winner's curse found in the empirical literature on ECB auctions by showing that it may be related to an identification problem. Overall the results suggest that strategic and optimal behavior is prevalent in ECB tenders. We find evidence of a statistically significant bid-shading component, even though the number of bidders is very large. Bid-shading increases with liquidity uncertainty and decreases with the number of participants and with price uncertainty. We argue that a sufficient condition for the latter effect to appear in the data is that the residual supply facing an individual bidder does not change much ex-post when very short-term market rates increase.repo auctions, monetary policy implementation, primary money market market, multi unit auctions, discriminatory auctions, collateral, central bank, nonparametric estimation

Structural econometric approach to bidding in the main refinancing operations of the Eurosystem

This paper contributes to the existing literature on central bank repoauctions. It is based on a structural econometric approach, whereby the primitives of bidding behavior (individual bid schedules and bid-shading components) are directly estimated. With the estimated parameters we calibrate a theoretical model in order to illustrate some comparative static results. Overall the results suggest that strategic and optimal behavior is prevalent in ECB tenders. We find evidence of a statistically significant bid-shading component, even though the number of bidders is very large. Bid- shading increases with liquidity uncertainty and decreases with the number of participants. JEL Classification: G21, G12, D44, E43, E50monetary policy implementation, primary money, repo auctions

Declining valuations and equilibrium bidding in central bank refinancing operations

It is argued that bidders in liquidity-providing central bank operations should typically possess declining marginal valuations. Based on this hypothesis, we construct an equilibrium in central bank refinancing operations organised as variable rate tenders. In the case of the discriminatory pricing rule, bid shading does not disappear in large populations. The predictions of the model are shown to be consistent with the data for the euro area. JEL Classification: D44, E52discriminatory auction, Eurosystem, Open market operations, uniform price auction