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Federal Reserve tools for managing rates and reserves

Author

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

Abstract

The Federal Reserve announced in January 2019 that it would maintain an ample supply of reserves amid its balance sheet reduction. We model the impact of reserves on banks? liquidity and balance sheet costs. In competitive general equilibrium, the optimal supply of reserves equates bank deposit rates to the interest rate paid on excess reserves (IOER), consistent with ample reserves. Raising the Fed?s overnight reverse repo rate up to IOER would increase liquidity, expediently reduce the overabundance of reserves, and stabilize the volatility of overnight market rates. Empirical analysis supports our model and can explain recent puzzles in money market rates.

Suggested Citation

  • Antoine Martin & David R. Skeie & James J. McAndrews & Ali Palida, 2013. "Federal Reserve tools for managing rates and reserves," Staff Reports 642, Federal Reserve Bank of New York, revised 01 Apr 2019.
  • Handle: RePEc:fip:fednsr:642
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    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr642.pdf
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    References listed on IDEAS

    as
    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, issue dec.
    2. Xavier Freixas & Antoine Martin & David Skeie, 2011. "Bank Liquidity, Interbank Markets, and Monetary Policy," Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2656-2692.
    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. 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.
    6. Todd Keister & Huberto M. Ennis, 2008. "Understanding monetary policy implementation," Economic Quarterly, Federal Reserve Bank of Richmond, issue sum, pages 235-263.
    7. R. Spence Hilton, 2005. "Trends in federal funds rate volatility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, issue jul.
    8. Antoine Martin & James McAndrews & David Skeie, 2016. "Bank Lending in Times of Large Bank Reserves," International Journal of Central Banking, International Journal of Central Banking, vol. 12(4), pages 193-222, December.
    9. James J. McAndrews & Antoine Martin & Todd Keister, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue sep, pages 41-56.
    10. 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.
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    Citations

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    Cited by:

    1. Stefania D'Amico & Roger Fan & Kitzul, Yuriy, 2013. "The Scarcity Value of Treasury Collateral: Repo Market Effects of Security-Specific Supply and Demand Factors," Working Paper Series WP-2013-22, Federal Reserve Bank of Chicago.
    2. Luca Dedola & Georgios Georgiadis & Johannes Gräb & Arnaud Mehl, 2018. "Does a Big Bazooka Matter? Central Bank Balance-Sheet Policies and Exchange Rates," GRU Working Paper Series GRU_2018_024, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    3. Primus, Keyra, 2017. "Excess reserves, monetary policy and financial volatility," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 153-168.
    4. Marcelo Rezende & Mary-Frances Styczynski & Cindy M. Vojtech, 2016. "The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations," Finance and Economics Discussion Series 2016-090, Board of Governors of the Federal Reserve System (US).
    5. Stephen D. Williamson, 2015. "Interest on Reserves, Interbank Lending, and Monetary Policy," Working Papers 2015-24, Federal Reserve Bank of St. Louis, revised 13 Sep 2015.
    6. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    7. Stephen D. Williamson, 2015. "Monetary Policy Normalization in the United States," Review, Federal Reserve Bank of St. Louis, pages 87-108.
    8. Ed Nosal & Rod Garratt & James J. McAndrews & Antoine Martin, 2015. "Segregated balance accounts," Staff Reports 730, Federal Reserve Bank of New York, revised 01 Aug 2015.
    9. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.
    10. repec:eee:moneco:v:101:y:2019:i:c:p:14-30 is not listed on IDEAS
    11. Michael Boutros & Jonathan Witmer, 2017. "Monetary Policy Implementation in a Negative Rate Environment," Staff Working Papers 17-25, Bank of Canada.
    12. Williamson, Stephen D., 2016. "Scarce collateral, the term premium, and quantitative easing," Journal of Economic Theory, Elsevier, vol. 164(C), pages 136-165.
    13. Joseph E. Gagnon & Brian Sack, 2014. "Monetary Policy with Abundant Liquidity: A New Operating Framework for the Fed," Policy Briefs PB14-4, Peterson Institute for International Economics.
    14. Yushi Endo & Takushi Kurozumi & Takemasa Oda & Kenichirou Watanabe, 2015. "Monetary Policy: Its Effects and Implementation: Summary of the 2015 BOJ-IMES Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 33, pages 1-24, November.
    15. Han Chen & Jim Clouse & Jane Ihrig & Elizabeth Klee, 2016. "The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 921-955, August.

    More about this item

    Keywords

    overnight reverse repurchases; balance sheet costs; Federal Reserve; liquidity; reserves; banks;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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