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Excess reserves and monetary policy normalization

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  • Roc Armenter
  • Benjamin Lester

Abstract

REVISED 8/14/16: In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market, along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes as well as to identify the conditions such that monetary policy implementation will be successful. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding how the market is likely to respond as policymakers raise the target rate.

Suggested Citation

  • Roc Armenter & Benjamin Lester, 2015. "Excess reserves and monetary policy normalization," Working Papers 15-35, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:15-35
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    Cited by:

    1. 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.
    2. 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 (U.S.).
    3. Stephen D. Williamson, 2015. "Interest on Reserves, Interbank Lending, and Monetary Policy," Working Papers 2015-24, Federal Reserve Bank of St. Louis.
    4. Guillaume Khayat, 2017. "The Corridor's Width as a Monetary Policy Tool," Working Papers halshs-01611650, HAL.
    5. Williamson, Stephen D., 2019. "Interest on reserves, interbank lending, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 14-30.
    6. Borghan Narajabad, 2017. "ON RRP and Stability of the Tri-party Market," 2017 Meeting Papers 1151, Society for Economic Dynamics.
    7. Michael Boutros & Jonathan Witmer, 2017. "Monetary Policy Implementation in a Negative Rate Environment," Staff Working Papers 17-25, Bank of Canada.
    8. Arun G. Chandrasekhar & Robert Townsend & Juan Pablo Xandri, 2018. "Financial Centrality and Liquidity Provision," NBER Working Papers 24406, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Excess reserves; Federal funds market; Federal funds rate;
    All these keywords.

    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
    • 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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