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By Ulrike Neyer

The construction of a unmarried financial foreign money and a unmarried financial coverage within the euro region has confronted remarkable demanding situations, between them the layout of compatible financial coverage tools. This publication evaluates financial coverage tools of the Eurosystem opposed to a few standards. For doing so, a theoretical version framework is built which brings jointly the financial coverage actions of a relevant financial institution and the liquidity administration of banks contemplating the most features and institutional positive factors of the euro region. major result of this research are that varied expenses of acquiring liquidity at once from the vital financial institution can clarify the lifestyles of an interbank industry within the euro zone and the confident unfold among the interbank industry fee and the repo expense; that the remodel of the Eurosystem’s tools in 2004 should be evaluated certainly and extra swap to the minimal reserve procedure could improve the pliability of financial coverage within the euro area.

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For fulfilling their reserve requirements banks can make use of averaging provisions. An important feature of our model is that reserves are remunerated at the end of each period at the current repo rate. As in the base model, the banks can cover their liquidity needs either by borrowing from the central bank or in the interbank market where they can also place liquidity. e. the maturities of the central bank credits do not overlap. Within this framework, the banks have to decide on their optimal borrowing from the central bank, their optimal transactions in the interbank market, and on the optimal intertemporal allocation of their required reserve holdings.

E. optimal liquidity management means deciding on • the optimal intertemporal allocation of reserve holdings (determination of R1opt and R2opt ), • the optimal borrowing from the central bank (determination of K1opt and K2opt ), and • and optimal transactions in the interbank market (determination of B1opt and B2opt ). Disregarding discounting, whose impact is negligible over this short horizon, the bank’s objective function becomes 2 min Kt ,Rt Ct (Kt , Rt ) . 6) t=1 Since the bank can make use of averaging provisions to fulfil its reserve requirements, it faces a simple dynamic optimization problem.

3 shows, aggregate demand and supply shrink such that the effect on e∗ is ambiguous. 4 Summary In this chapter, we have presented the base model of this work. First, we considered a single bank which minimizes its total liquidity costs by choosing its optimal central bank borrowing and optimal transactions in the interbank market. Then, we have looked at the banking sector as a whole, assuming that banks differ in their opportunity costs of holding collateral, which is a key feature in all models we will present in this work.

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