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Working Paper
Short Takes on Monetary Policy Strategy : An Introduction to Some Basic Concepts
Over recent decades, central banks have made enormous strides in enhancing transparency around many elements of the formulation and conduct of monetary policy. Still, even for an audience of seasoned policy experts, providing clarity about aspects of monetary policy strategy is a daunting task and all the more so when the audience extends to the public at large. This collection of short notes attempts to take a small step in fostering more inclusive discussion of monetary policy strategy by presenting some standard results in a way that may be useful as an introduction to basic concepts for ...
Journal Article
Recent developments in discount window policy
Discussion Paper
The Fed’s Balance Sheet Runoff: The Role of Levered NBFIs and Households
In a Liberty Street Economics post that appeared yesterday, we described the mechanics of the Federal Reserve’s balance sheet “runoff” when newly issued Treasury securities are purchased by banks and money market funds (MMFs). The same mechanics would largely hold true when mortgage-backed securities (MBS) are purchased by banks. In this post, we show what happens when newly issued Treasury securities are purchased by levered nonbank financial institutions (NBFIs)—such as hedge funds or nonbank dealers—and by households.
Working Paper
A Sequential Bargaining Model of the Fed Funds Market with Excess Reserves
We model bargaining between non-bank investors and heterogeneous bank borrowers in the federal funds market. The analysis highlights how the federal funds rate will respond to movements in other money market interest rates in an environment with elevated levels of excess reserves. The model predicts that the administered rate offered through the Federal Reserve's overnight reverse repurchase agreement facility influences the fed funds rate even when the facility is not used. Changes in repo rates pass through to the federal funds rate, but by less than one-for-one. We calibrate the model to ...
Working Paper
Declining required reserves and the volatility of the federal funds rate.
Low required reserve balances in 1991 led to a sharp increase in the volatility of the federal funds rate, but similarly low balances in 1996 did not. This paper develops and simulates a microeconomic model of the funds market that explains these facts. We show that reductions in reserve balances increase the volatility of the federal funds rate, but that this relationship changes over time in response to observable changes in bank behavior. The model predicts that a continued decline in required reserves could increase funds-rate volatility significantly.
Working Paper
Monetary policy and financial stability risks: an example
The financial crisis and its aftermath have raised numerous questions about the appropriate role of financial stability considerations in the conduct of monetary policy. This paper develops a simple example of the possible connections between financial stability and monetary policy. We find that even without an explicit financial stability goal for monetary policy, financial stability considerations arise naturally in the context of standard models of optimal monetary policy if the potential magnitude of financial stability shocks is affected by the stance of policy. In this case, similar to ...
Working Paper
Reading the minds of investors: an empirical term structure model for policy analysis
Building on the recent macro finance literature, this paper develops an empirical term structure model in which investors' judgmental forecasts of macro variables play an important role. The model allows for a limited form of time-variation in the dynamics describing the behavior of short-term interest rates and macro variables. As a result, changes in economic forecasts over time reflect the influence of both economic shocks and perceived changes in economic structure. The latter, in particular, are shown to be important in explaining the evolution of the yield curve over time. An interest ...
Working Paper
The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets
This paper develops a model of the financial system that provides a framework for analyzing monetary policy implementation in a world with multiple Federal Reserve liabilities and a superabundant supply of reserves. The analysis demonstrates that the Federal Reserve's suite of policy tools including interest on excess reserves (IOER), overnight and term reverse repurchase agreements, and term deposits should allow the Federal Reserve to raise the level of short-term interest rates at the appropriate time. The model also demonstrates that these tools could be used in different ways to achieve ...
Discussion Paper
The Fed’s Balance Sheet Runoff and the ON RRP Facility
A 2017 Liberty Street Economics post described the balance sheet effects of the Federal Open Market Committee’s decision to cease reinvestments of maturing securities—that is, the mechanics of the Federal Reserve’s balance sheet “runoff.” At the time, the overnight reverse repo (ON RRP) facility was fairly small (less than $200 billion for most of July 2017) and was not mentioned in the post for the sake of simplicity. Today, by contrast, take-up at the ON RRP facility is much larger (over $1.5 trillion for most of 2022). In this post, we update the earlier analysis and describe how ...