Search Results
Journal Article
Challenges in identifying interbank loans
Although interbank lending markets play a key role in the financial system, the lack of disaggregated data often makes the analysis of these markets difficult. To address this problem, recent academic papers focusing on unsecured loans of central bank reserves have employed an algorithm in an effort to identify individual transactions that are federal funds loans. The accuracy of the algorithm, however, is not known. The authors of this study conduct a formal test with U.S. data and find that the rate of false positives produced by one of these algorithms is on average 81 percent; the rate of ...
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 2007-2009 financial crisis. We find that the optimal level of reserve supply ...
Report
Evaluating the quality of fed funds lending estimates produced from Fedwire payments data
A number of empirical analyses of interbank lending rely on indirect inferences from individual interbank transactions extracted from payments data using algorithms. In this paper, we conduct an evaluation to assess the ability of identifying overnight U.S. fed funds activity from Fedwire payments data. We find evidence that the estimates extracted from the data are statistically significantly correlated with banks' fed funds borrowing as reported on the FRY-9C. We find similar associations for fed funds lending, although the correlations are lower. To be conservative, we believe that the ...
Working Paper
Monetary Policy Implementation with Ample Reserves
We offer a parsimonious model of the reserve demand to study the tradeoffs associated with various monetary policy implementation frameworks. Prior to the 2007–09 financial crisis, many central banks supplied scarce reserves to execute their interest-rate policies. In response to the crisis, central banks undertook quantitative-easing policies that greatly expanded their balance sheets and, by extension, the amount of reserves they supplied. When the crisis and its aftereffects passed, central banks were in a position to choose a framework that has reserves that are (1) abundant—by ...
Working Paper
Excess Reserves and Monetary Policy Implementation
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 ...
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 ...
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 ...
Journal Article
The Market Events of Mid-September 2019
This article studies the mid-September 2019 stress in U.S. money markets: On September 16 and 17, unsecured and secured funding rates spiked, and on September 17, the effective federal funds rate broke the ceiling of the Federal Open Market Committee (FOMC) target range. We highlight two factors that may have contributed to these events. First, reserves may have become scarce for at least some depository institutions, in the sense that these institutions’ reserve holdings may have been close to, or lower than, their desired level. Moreover, frictions in the interbank market may have ...
Report
A model of the federal funds market: yesterday, today, and tomorrow
The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before ...
Report
Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve
What level of central bank reserves satiates banks’ demand for liquidity? We estimate the slope of the reserve demand curve in the United States over 2010-21 using a time-varying instrumental-variable approach at the daily frequency. When reserves exceed 12-13 percent of banks’ assets, demand for reserves is satiated: reserves are abundant, and the demand curve is flat; below this threshold, the curve’s slope becomes increasingly negative as reserves decline from ample to scarce. We also find that reserve demand has shifted over time, both vertically and horizontally. Our methodology ...