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Federal Reserve Bank of Philadelphia
Working Papers
Excess reserves and monetary policy normalization
Roc Armenter
Benjamin Lester
Abstract

REVISED 8/14/16: In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market, along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes as well as to identify the conditions such that monetary policy implementation will be successful. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding how the market is likely to respond as policymakers raise the target rate.


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Roc Armenter & Benjamin Lester, Excess reserves and monetary policy normalization, Federal Reserve Bank of Philadelphia, Working Papers 15-35, 15 Sep 2015, revised 14 Aug 2016.
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Keywords: Excess reserves; Federal funds market; Federal funds rate
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