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Federal Reserve tools for managing rates and reserves

Author

Listed:
  • Antoine Martin
  • James J. McAndrews
  • Ali Palida
  • David R. Skeie

Abstract

Monetary policy measures taken by the Federal Reserve as a response to the 2007-09 financial crisis and subsequent economic conditions led to a large increase in the level of outstanding reserves. The Federal Open Market Committee (FOMC) has a range of tools to control short-term market rates in this situation. We study several of these tools, namely, interest on excess reserves (IOER), reverse repurchase agreements (RRPs), and the term deposit facility (TDF). We find that overnight RRPs (ON RRPs) may provide a better floor on rates than term RRPs because they are available to absorb daily liquidity shocks. Whether the TDF or RRPs best support equilibrium rates depends on the intensity of interbank monitoring costs versus balance sheet costs, respectively, that banks face. In our model, using the RRP and TDF concurrently may most effectively stabilize short-term rates close to the IOER rate when such costs are rapidly increasing.

Suggested Citation

  • Antoine Martin & James J. McAndrews & Ali Palida & David R. Skeie, 2013. "Federal Reserve tools for managing rates and reserves," Staff Reports 642, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:642
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    References listed on IDEAS

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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. Huberto M. Ennis & Todd Keister, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 235-263.
    3. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
    4. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    5. R. Spence Hilton, 2005. "Trends in federal funds rate volatility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Jul).
    6. Todd Keister & Antoine Martin & James J. McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
    7. Anil K. Kashyap & Jeremy C. Stein, 2012. "The Optimal Conduct of Monetary Policy with Interest on Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 266-282, January.
    8. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
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    Cited by:

    1. Michael Boutros & Jonathan Witmer, 2017. "Monetary Policy Implementation in a Negative Rate Environment," Staff Working Papers 17-25, Bank of Canada.
    2. Primus, Keyra, 2017. "Excess reserves, monetary policy and financial volatility," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 153-168.
    3. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    4. Williamson, Stephen D., 2016. "Scarce collateral, the term premium, and quantitative easing," Journal of Economic Theory, Elsevier, vol. 164(C), pages 136-165.
    5. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.

    More about this item

    Keywords

    Federal Open Market Committee ; Monetary policy ; Bank reserves ; Bank liquidity ; Interest rates ; Repurchase agreements;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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