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Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve

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Abstract

What level of central bank reserves satiates banks’ demand for liquidity? We estimate the slope of the reserve demand curve in the United States over 2010-21 using a time-varying instrumental-variable approach at the daily frequency. When reserves exceed 12-13 percent of banks’ assets, demand for reserves is satiated: reserves are abundant, and the demand curve is flat; below this threshold, the curve’s slope becomes increasingly negative as reserves decline from ample to scarce. We also find that reserve demand has shifted over time, both vertically and horizontally. Our methodology works well out-of-sample and can assess reserve ampleness in real time.

Suggested Citation

  • Gara Afonso & Domenico Giannone & Gabriele La Spada & John C. Williams, 2022. "Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve," Staff Reports 1019, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:94278
    Note: Revised April 2024.
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    References listed on IDEAS

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    More about this item

    Keywords

    demand for reserves; federal funds market; monetary policy;
    All these keywords.

    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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