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The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations

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  • Carpenter, Seth
  • Demiralp, Selva

Abstract

We use forecast errors made by the Federal Reserve while preparing open market operations to identify a liquidity effect at a daily frequency in the federal funds market. We find a liquidity effect on most days of the reserve maintenance period in addition to settlement day. The effect is nonlinear; large changes in supply more consistently have a measurable effect than do small changes. In addition, a higher aggregate level of reserve balances in the banking system is associated with a smaller liquidity effect during the maintenance period but a larger liquidity effect on the last days of the period.

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  • Carpenter, Seth & Demiralp, Selva, 2006. "The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 901-920, June.
    • Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:4:p:901-920
    DOI: 10.1353/mcb.2006.0051
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