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

Afonso, Gara; Giannone, Domenico; La Spada, Gabriele; Williams, John C.

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

Abstract: Does the federal funds rate respond to shocks when aggregate reserves are in the trillions of dollars? Has banks’ demand for reserves moved over time? We provide a structural time-varying estimate of the slope of the reserve demand curve over 2010-21. We estimate a time-varying vector autoregressive model at daily frequency with an instrumental variable approach to address endogeneity. Consistent with economic theory, our estimates show a nonlinear demand function that exhibits a negative slope in 2010-11 and 2018-19 but is flat over 2012-17 and after mid-2020. We also find that the curve has moved outward, both vertically and horizontally.

Keywords: demand for reserves; federal funds market; monetary policy;

JEL Classification: E41; E43; E52; E58; G21;