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The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets

Listed author(s):
  • Clouse, James A.

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

  • Ihrig, Jane E.

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

  • Klee, Elizabeth C.

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

  • Chen, Han

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

Registered author(s):

    This paper develops a model of the financial system that provides a framework for analyzing monetary policy implementation in a world with multiple Federal Reserve liabilities and a superabundant supply of reserves. The analysis demonstrates that the Federal Reserve's suite of policy tools including interest on excess reserves (IOER), overnight and term reverse repurchase agreements, and term deposits should allow the Federal Reserve to raise the level of short-term interest rates at the appropriate time. The model also demonstrates that these tools could be used in different ways to achieve any given desired level of interest rates. The choices among alternative combinations of tools, of course, have implications for patterns of financial intermediation. Specifically, the quantity of Federal Reserve liabilities held outside of the banking system is shown to depend importantly on the spread between various policy rates.

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    File URL: http://www.federalreserve.gov/econresdata/feds/2014/files/201483pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2014-83.

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    Length: 38 pages
    Date of creation: 02 Oct 2014
    Handle: RePEc:fip:fedgfe:2014-83
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    Web page: http://www.federalreserve.gov/

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    1. Todd Keister & James J. McAndrews, 2009. "Why are banks holding so many excess reserves?," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Dec).
    2. Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 47-82, 02.
    3. Canlin Li & Min Wei, 2013. "Term Structure Modeling with Supply Factors and the Federal Reserve's Large-Scale Asset Purchase Progarms," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 3-39, March.
    4. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    5. Backus, David & Purvis, Douglas, 1980. "An Integrated Model of Household Flow-of-Funds Allocations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(2), pages 400-421, Special I.
    6. Bech, Morten L. & Klee, Elizabeth, 2011. "The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 415-431.
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