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A Positive Theory of Fixed-Rate Funds-Supplying Operations in an Accommodative Financial Environment

May 2011
Junnosuke Shino*1

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This paper studies bidding behaviors in fixed-rate funds-supplying auctions using a simple game-theoretic model. While the existing literature argues that such auction schemes are vulnerable to the overbidding problem, the bid-to-cover ratio for the Bank of Japan's current fixed-rate operations has remained stable. We modify the stylized repo game by incorporating the current framework of fixed-rate funds-supplying auctions operated by the Bank of Japan and the accommodative financial environment recently experienced in Japan. It is shown that any stable bid-to-cover ratios other than either undersubscription or overbidding can be supported by an equilibrium in the modified game.

The author is grateful for valuable comments from Hiroshi Fujiki, Yuji Fujinaka, Ippei Fujiwara, Emiko Fukuda, Hirokazu Ishise, Daijiro Okada, Tomas Sjöström, and seminar participants at Auctions Conducted by Central Banks during the Crisis, a workshop held by the Federal Reserve Bank of New York, November 22, 2010. A short version of this paper appeared in Box 3 of Bank of Japan*2. The views expressed herein are those of the author and should not be interpreted as those of the Bank of Japan.

  •   *1 Financial Markets Department, Bank of Japan.
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  •   *2 Bank of Japan (2011). Financial Markets Report (February 2011).


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