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Jel Classification:E58 

Discussion Paper
How the Fed’s Overnight Reverse Repo Facility Works

Daily take-up at the overnight reverse repo (ON RRP) facility increased from less than $1 billion in early March 2021 to just under $2 trillion on December 31, 2021. In the second post in this series, we take a closer look at this important tool in the Federal Reserve’s monetary policy implementation framework and discuss the factors behind the recent increase in volume.
Liberty Street Economics , Paper 20220111

Working Paper
How to Starve the Beast: Fiscal Policy Rules

Countries have widely imposed fiscal rules designed to constrain government spending and ensure fiscal responsibility. This paper studies the effectiveness and welfare implications of revenue, deficit and debt rules when governments are discretionary and profligate. The optimal prescription is a revenue ceiling coupled with a balance budget requirement. For the U.S., the optimal revenue ceiling is about 15% of output, 3 percentage points below the postwar average. Most of the benefits can still be reaped with a milder constraint or escape clauses during adverse times. Imposing a single fiscal ...
Working Papers , Paper 2019-026

Working Paper
Liquidity Traps and Monetary Policy: Managing a Credit Crunch

We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. These two frictions give rise to a nontrivial financial market in a monetary economy. A tightening of the collateral constraint results in a recession generated by a credit crunch. The model can be used to study the effects on the main macroeconomic variables, and on the welfare of each individual of alternative monetary and fiscal policies following the credit crunch. The model reproduces several features of the recent financial crisis, such as the persistent negative real interest rates, the ...
Working Papers , Paper 714

Working Paper
Helicopter Drops and Liquidity Traps

We show that if the central bank operates without commitment and faces constraints on its balance sheet, helicopter drops can be a useful stabilization tool during a liquidity trap. With commitment, even with balance sheet constraints, helicopter drops are, at best, irrelevant.
Working Papers , Paper 797

Journal Article
The evolution of Federal Reserve policy and the impact of monetary policy surprises on asset prices

This article describes the joint evolution of Federal Reserve policy and the study of the impact of monetary policy surprises on high-frequency asset prices. Since the 1970s, the Federal Open Market Committee has clarified its objectives and modified its procedures to become more transparent and predictable. Researchers have had to account for these changes to procedures and perceived objectives in developing methods to study the effects of monetary surprises. Unexpected changes to the Committee?s federal funds target and postmeeting statements strongly and consistently affect asset prices, ...
Review , Volume 96 , Issue 1 , Pages 73-109

Working Paper
Fiscal Implications of the Federal Reserve's Balance Sheet Normalization

The paper surveys the recent literature on the fiscal implications of central bank balance sheets, with a special focus on political economy issues. It then presents the results of simulations that describe the effects of different scenarios for the Federal Reserve's longer-run balance sheet on its earnings remittances to the U.S. Treasury and, more broadly, on the government's overall fiscal position. We find that reducing longer-run reserve balances from $2.3 trillion (roughly the current amount) to $1 trillion reduces the likelihood of posting a quarterly net loss in the future from 30 ...
Working Papers , Paper 747

Discussion Paper
Is monetary policy overburdened?

Following the experience of the global financial crisis, central banks have been asked to undertake unprecedented responsibilities. Governments and the public appear to have high expectations that monetary policy can provide solutions to problems that do not necessarily fit in the realm of traditional monetary policy. This paper examines three broad public policy goals that may overburden monetary policy: full employment; fiscal sustainability; and financial stability. While central banks have a crucial position in public policy, the appropriate policy mix also involves other institutions, ...
Public Policy Discussion Paper , Paper 13-8

Working Paper
The FOMC's Committee on the Directive: Behind Volcker's New Operating Procedures

On October 6, 1979, Chairman Volcker announced that the Federal Reserve was embarking on a new, forceful, and ultimately successful campaign to lower the rampant inflation of that time. At the center of this campaign were new operating procedures for conducting monetary policy—procedures that focused daily open market operations on controlling the quantity of monetary reserves and the quantity of nonborrowed reserves in particular. This was a dramatic shift from the prior focus on targeting the federal funds rate. These new operating procedures were preceded by well over a decade of work ...
Finance and Economics Discussion Series , Paper 2022-063

Working Paper
Forward guidance and the state of the economy

This paper examines forward guidance using a nonlinear New Keynesian model with a zero lower bound (ZLB) constraint on the nominal interest rate. Forward guidance is modeled with news shocks to the monetary policy rule. The effectiveness of forward guidance depends on the state of the economy, the speed of the recovery, the ZLB constraint, the degree of uncertainty, the monetary response to inflation, the size of the news shocks, and the forward guidance horizon. Specifically, the stimulus from forward guidance falls as the economy deteriorates or as households expect a slower recovery. When ...
Working Papers , Paper 1612

Working Paper
Optimal Dynamic Capital Requirements and Implementable Capital Buffer Rules

We build a quantitatively relevant macroeconomic model with endogenous risk-taking. In our model, deposit insurance and limited liability can lead banks to make risky loans that are socially inefficient. This excessive risk-taking can be triggered by aggregate or sectoral shocks that reduce the return on safer loans. Excessive risk-taking can be avoided by raising bank capital requirements, but unnecessarily tight requirements lower welfare by limiting liquidity producing bank deposits. Consequently, optimal capital requirements are dynamic (or state contingent). We provide examples in which ...
Finance and Economics Discussion Series , Paper 2020-056

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