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: 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.

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

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