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Working Paper
Retail CBDC and U.S. Monetary Policy Implementation: A Stylized Balance Sheet Analysis
This paper discusses how a Federal Reserve issued retail central bank digital currency (CBDC) could affect U.S. monetary policy implementation. Using a stylized balance sheet analysis, we analyze the effect a retail CBDC could have on the balance sheets of the Federal Reserve, commercial banks, and U.S. households. Then we consider how these balance sheet changes could affect monetary policy implementation for the Federal Reserve. We illustrate that the potential effects on monetary policy implementation from a retail CBDC are highly dependent on the initial conditions of the Federal ...
Working Paper
The Fed’s “Ample-Reserves” Approach to Implementing Monetary Policy
We describe the Federal Reserve’s (the Fed’s) approach to implementing monetary policy in an ample-reserves regime. We use a stylized model to explain the factors the Fed considers and the tools it uses to ensure interest rate control when the quantity of reserves is ample. Then, we take a close look at the Fed’s experience operating in this regime in the post-crisis period, both as it has raised and lowered its policy rate. Looking ahead, we highlight some considerations relevant for maintaining a level of reserves consistent with the efficient and effective implementation of ...
Discussion Paper
Size Is Not All: Distribution of Bank Reserves and Fed Funds Dynamics
As a consequence of the Federal Reserve’s large-scale asset purchases from 2008-14, banks’ reserve balances at the Fed have increased dramatically, rising from $10 billion in March 2008 to more than $2 trillion currently. In that new environment of abundant reserves, the FOMC put in place a framework for controlling the fed funds rate, using the interest rate that it offered to banks and a different, lower interest rate that it offered to non-banks (and banks). Now that the Fed has begun to gradually reduce its asset holdings, aggregate reserves are shrinking as well, and an important ...
Working Paper
The Effects of CBDC on the Federal Reserve's Balance Sheet
We propose a parsimonious framework to understand how the issuance of central bank digital currency (CBDC) might affect the financial system, the Federal Reserve's balance sheet, and the implementation of monetary policy. We show that there is a wide range of outcomes on the financial system and the Federal Reserve's balance sheet that could reasonably occur following CBDC issuance. Our analysis highlights that the potential effects on the financial sector depend critically on how the Fed manages its balance sheet. In particular, CBDC could in principle put substantial upward pressure on the ...
Working Paper
The FOMC’s Use of Operational Targets: 85 Years and Counting
This paper uses summaries of the Federal Open Market Committee’s (FOMC’s) meetings to identify its operational targets and map those to operating regimes. We find that operational targets were more often discussed in the earlier part of the FOMC’s 85-year history, but recent years have seen a resurgence in discussions. We identify distinct operating regimes and findthat regimes with discussions of multiple targets, usually rate and quantity pairs, are more common than regimes dominated by discussions of single targets. We document that the current period (the 2007-2009 financial crisis ...
Working Paper
The FOMC’s Use of Operational Targets: 85 Years and Counting
This paper uses summaries of the Federal Open Market Committee’s (FOMC’s) meetings to identify its operational targets and map those to operating regimes. We find that operational targets were more often discussed in the earlier part of the FOMC’s 85-year history, but recent years have seen a resurgence in discussions. We identify distinct operating regimes and findthat regimes with discussions of multiple targets, usually rate and quantity pairs, are more common than regimes dominated by discussions of single targets. We document that the current period (the 2007-2009 financial crisis ...
Working Paper
A Simple Model of Voluntary Reserve Targets with Tolerance Bands
This note presents a simplifed version of the model of voluntary reserve targets (VRT) developed in Baughman and Carapella (forthcoming), with a Walrasian interbank market. First, the model makes transparent the role of target setting in controlling the market rate. Second, the simplicity of the model allows for an analysis of the interaction between VRT and tolerance bands, which are a common tool for controlling rate variability. We find that the persistent overshooting of interbank rates observed during the Bank of England's experiment with VRT may derive from the interaction between ...
Working Paper
Monetary Policy Implementation with an Ample Supply of Reserves
Methods of monetary policy implementation continue to change. The level of reserve supply---scarce, abundant, or somewhere in between---has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007-09 financial crisis. We find that the optimal level of reserve supply ...
Working Paper
The Effects of CBDC on the Federal Reserve's Balance Sheet
We propose a parsimonious framework to understand how the issuance of central bank digital currency (CBDC) might affect the financial system, the Federal Reserve's balance sheet, and the implementation of monetary policy. We show that there is a wide range of outcomes on the financial system and the Federal Reserve's balance sheet that could reasonably occur following CBDC issuance. Our analysis highlights that the potential effects on the financial sector depend critically on how the Fed manages its balance sheet. In particular, CBDC could in principle put substantial upward pressure on the ...
Working Paper
The Federal Reserve’s Evolving Monetary Policy Implementation Framework: 1914-1923
The Federal Reserve has relied upon a number of different monetary policy implementation frameworks throughout its history. This paper describes the original implementation framework that evolved between 1914 and 1923 in response to new policy objectives and changing market conditions.