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 U.S. over 2010–2024 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 and reserves are abundant; 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, and identify important drivers of vertical shifts. Our methodology works well out-of-sample and can assess reserve ampleness in real time.

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