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The Dynamics of Ample Reserves

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  • Roc Armenter

Abstract

How monetary policy is implemented can have significant implications for the dynamics of the central bank’s balance sheet. If liquid deposits increase the demand for reserves (Lopez-Salido and Vissing-Jorgensen 2025), then the “ample” level of reserves needed to close the spread between the policy rate and interest on reserves is itself a function of liquid deposits. The supply of reserves will continue to normalize after first reaching ample levels and until liquid deposits return to trend as well. Furthermore, if the supply of reserves encourages deposit creation (Acharya et al. 2024), then a feedback loop arises that can amplify the persistence of elevated deposits and even lead to explosive dynamics. An off-the-shelf calibration exercise finds that even modest amounts of intrinsic deposit persistence could trigger explosive dynamics. Attenuating the response of ample reserves to deposits removes the risk of instability at a modest cost in terms of rate deviations. Simulations with stable roots show that reserves first reach ample earlier and at a higher level than expected by the demand of reserves alone. However, the supply of reserves may decrease further thereafter, at least relative to trend, as liquid deposits remain elevated in the transition period.

Suggested Citation

  • Roc Armenter, 2026. "The Dynamics of Ample Reserves," Working Papers 26-34, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:103530
    DOI: 10.21799/frbp.wp.2026.34
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    References listed on IDEAS

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    1. Lorie Logan, 2026. "Outlook for the economy and monetary policy," Speeches and Essays 102851, Federal Reserve Bank of Dallas.
    2. Erin E. Syron Ferris & Amy Rose & Manjola Tase, 2025. "What can public Fedwire payments data tell us about ample reserves?," FEDS Notes 2025-07-18-3, Board of Governors of the Federal Reserve System (U.S.).
    3. Roc Armenter & Benjamin Lester, 2017. "Excess Reserves and Monetary Policy Implementation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 212-235, January.
    4. Huberto M. Ennis & Alexander L. Wolman, 2015. "Large Excess Reserves in the United States: A View from the Cross-Section of Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 11(1), pages 251-289, January.
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    Keywords

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    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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

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