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Money and interest rates under a reserves operating target

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  • Robert B. Avery
  • Myron L. Kwast
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    Abstract

    This study examines the short-run dynamic relationships between nonborrowed reserves, the federal funds rate, and transaction accounts using daily data from 1979 through 1982. Separate models are estimated for each day of the week, and simulation experiments are performed. The results suggest that the funds rate responded quite rapidly to a change in nonborrowed reserves, but that the short-run nonborrowed reserves multiplier for transaction accounts was only about 18 percent of its theoretical maximum. In addition, the Federal Reserve appeared to accommodate about 65 percent of a permanent shock to money, and lagged reserve requirements seemed to delay depository institutions' response to a money shock.

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    File URL: http://www.clevelandfed.org/Research/Review/1993/93-q2-avery.pdf
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    Bibliographic Info

    Article provided by Federal Reserve Bank of Cleveland in its journal Economic Review.

    Volume (Year): (1993)
    Issue (Month): Q II ()
    Pages: 24-34

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    Handle: RePEc:fip:fedcer:y:1993:i:qii:p:24-34:n:v.29no.2

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    Related research

    Keywords: Interest rates ; Bank reserves;

    References

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    1. Eric M. Leeper & David B. Gordon, 1991. "In search of the liquidity effect," Working Paper 91-17, Federal Reserve Bank of Atlanta.
    2. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    3. Tinsley, Peter A, et al, 1982. "Policy Robustness: Specification and Simulation of a Monthly Money Market Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 829-56, November.
    4. Johannes, James M & Rasche, Robert H, 1981. "Can the Reserves Approach to Monetary Control Really Work?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(3), pages 298-313, August.
    5. Tarhan, Vefa & Spindt, Paul A., 1983. "Bank earning asset behavior and causality between reserves and money : Lagged versus contemporaneous reserve accounting," Journal of Monetary Economics, Elsevier, vol. 12(2), pages 331-341.
    6. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
    7. Marvin Goodfriend, 1986. "A weekly rational expectations model of the nonborrowed reserve operating procedure," Economic Review, Federal Reserve Bank of Richmond, issue Jan, pages 11-28.
    8. Poole, William, 1982. "Federal Reserve Operating Procedures: A Survey and Evaluation of the Historical Record since October 1979," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 575-96, November.
    9. David S. Jones, 1981. "Contemporaneous vs. lagged reserve accounting: implications. for monetary control," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 3-19.
    10. Marvin Goodfriend & Gary Anderson & Anil Kashyap & George Moore & Richard D. Porter, 1984. "A weekly perfect foresight model of the nonborrowed reserve operating procedure," Working Paper 84-04, Federal Reserve Bank of Richmond.
    11. William T. Gavin & Nicholas V. Karamouzis, 1985. "The reserve market and the information content of M1 announcements," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 11-28.
    12. Stephen H. Axilrod, 1982. "Monetary policy, money supply, and the Federal Reserve's operating procedures," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jan, pages 13-24.
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