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Whither the liquidity effect: The impact of Federal Reserve open market operations in recent years

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  • Judson, Ruth A.
  • Klee, Elizabeth
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    Abstract

    Previous research indicated that the daily liquidity effect, or the change in the federal funds rate associated with an exogenous change in Fed balances, varies with several factors including the day of the maintenance period. In this paper, we examine data from 1998 to 2007, the recent period of increased Federal Reserve transparency before the financial crisis, and find that the liquidity effect stabilized across days of the maintenance period. We conclude that the liquidity effect may be a function of the uncertainty about banks' end-of-day balances, as well as pure maintenance period effects. Moreover, we find that increased transparency led to a larger liquidity effect on the days prior to an FOMC meeting.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 32 (2010)
    Issue (Month): 3 (September)
    Pages: 713-731

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    Handle: RePEc:eee:jmacro:v:32:y:2010:i:3:p:713-731

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    Web page: http://www.elsevier.com/locate/inca/622617

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    Keywords: Liquidity effect Federal funds market Open market operations;

    References

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    1. Carpenter, Seth & Demiralp, Selva, 2006. "Anticipation of Monetary Policy and Open Market Operations," MPRA Paper 704, University Library of Munich, Germany.
    2. Daniel L. Thornton, 2001. "Identifying the liquidity effect at the daily frequency," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 59-82.
    3. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    4. Huberto M. Ennis & Todd Keister, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 235-263.
    5. Hamilton, James D, 1997. "Measuring the Liquidity Effect," American Economic Review, American Economic Association, vol. 87(1), pages 80-97, March.
    6. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
    7. Cheryl L. Edwards, 1997. "Open market operations in the 1990s," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 859-874.
    8. Seth Carpenter & Selva Demiralp, 2008. "The Liquidity Effect in the Federal Funds Market: Evidence at the Monthly Frequency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 1-24, 02.
    9. Ben S. Bernanke & Ilian Mihov, 1998. "The Liquidity Effect and Long-Run Neutrality," NBER Working Papers 6608, National Bureau of Economic Research, Inc.
    10. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
    11. James A. Clouse & Douglas W. Elmendorf, 1997. "Declining required reserves and the volatility of the federal funds rate," Finance and Economics Discussion Series 1997-30, Board of Governors of the Federal Reserve System (U.S.).
    12. Seth Carpenter & Selva Demiralp, 2004. "The liquidity effect in the federal funds market: evidence from daily open market operations," Finance and Economics Discussion Series 2004-61, Board of Governors of the Federal Reserve System (U.S.).
    13. Hamilton, James D., 1998. "The supply and demand for Federal Reserve deposits," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 1-44, December.
    14. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 137-59, February.
    15. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," NBER Working Papers 14028, National Bureau of Economic Research, Inc.
    16. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February.
    17. Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," Working Paper 91-17, Federal Reserve Bank of Atlanta.
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    Cited by:
    1. Marquez, Jaime & Morse, Ari & Schlusche, Bernd, 2013. "The Federal Reserve’s balance sheet and overnight interest rates: Empirical modeling of exit strategies," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5300-5315.
    2. Yasuo Hirose & Shinsuke Ohyama, 2010. "Identifying the Effect of the Bank of Japan's Liquidity Facilities: The Case of Commercial Paper Operations During the Financial Turmoil," International Finance, Wiley Blackwell, vol. 13(3), pages 461-483, Winter.
    3. Judson, Ruth A. & Klee, Elizabeth, 2011. "Big bank, small bank: Monetary policy implementation and banks' reserve management strategies," Journal of Economics and Business, Elsevier, vol. 63(4), pages 306-328, July.
    4. Kopchak, Seth J., 2011. "The liquidity effect for open market operations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3292-3299.

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