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Federal Reserve Bank of New York
Federal Reserve tools for managing rates and reserves
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.
Cite this item
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.
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Keywords: banks; balance sheet costs; liquidity; Federal Reserve; reserves; overnight reverse repurchases
This item with handle RePEc:fip:fednsr:642
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