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An Analysis of the Reserve Market: Interpreting Vector Autoregressions Using a Theoretical Model

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  • Imho Kang

    (KISDI)

Abstract

This paper studies the reserve market by interpreting vector autoregression (VAR) using an optimizing equilibrium model. A theoretical model of loan and reserve markets, where banks solve a dynamic maximization problem and the Federal Reserve Board controls the supply of reserves, is constructed and solved numerically. A trivariate VAR summarizes the dynamics of the federal funds rate, the one-month commercial paper rate, and real nonborrowed reserves from 1984:3 to 1996:1. In the spirit of Gallant and Tauchen (1996), the scores of the estimated VAR are used as orthogonality conditions for Generalized Methods of Moments to calibrate the model. It is shown that, since 1984, the reserve supply shocks dominate reserve demand shocks in the residual of the federal funds rate equation in the VAR I conclude that the residual offers a reasonable proxy for an exogenous shock to monetary policy.

Suggested Citation

  • Imho Kang, 2000. "An Analysis of the Reserve Market: Interpreting Vector Autoregressions Using a Theoretical Model," Korean Economic Review, Korean Economic Association, vol. 16, pages 339-367.
    • Handle: RePEc:kea:keappr:ker-200012-16-2-09
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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