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Federal Reserve Bank of New York
Staff Reports
Federal Reserve tools for managing rates and reserves
Antoine Martin
James J. McAndrews
Ali Palida
David R. Skeie
Abstract

The Federal Reserve announced in January 2019 that it would maintain an ample supply of reserves amid its balance sheet reduction. We model the impact of reserves on banks’ liquidity and balance sheet costs. In competitive general equilibrium, the optimal supply of reserves equates bank deposit rates to the interest rate paid on excess reserves (IOER), consistent with ample reserves. Raising the Fed’s overnight reverse repo rate up to IOER would increase liquidity, expediently reduce the overabundance of reserves, and stabilize the volatility of overnight market rates. Empirical analysis supports our model and can explain recent puzzles in money market rates.


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Antoine Martin & James J. McAndrews & Ali Palida & David R. Skeie, Federal Reserve tools for managing rates and reserves, Federal Reserve Bank of New York, Staff Reports 642, 01 Sep 2013, revised 01 Apr 2019.
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Keywords: banks; balance sheet costs; liquidity; Federal Reserve; reserves; overnight reverse repurchases
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