The Dynamics of Ample Reserves

Roc Armenter

No 26-34, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: How monetary policy is implemented can have significant implications for the dynamics of the central bank’s balance sheet. If liquid deposits increase the demand for reserves (Lopez-Salido and Vissing-Jorgensen 2025), then the “ample” level of reserves needed to close the spread between the policy rate and interest on reserves is itself a function of liquid deposits. The supply of reserves will continue to normalize after first reaching ample levels and until liquid deposits return to trend as well. Furthermore, if the supply of reserves encourages deposit creation (Acharya et al. 2024), then a feedback loop arises that can amplify the persistence of elevated deposits and even lead to explosive dynamics. An off-the-shelf calibration exercise finds that even modest amounts of intrinsic deposit persistence could trigger explosive dynamics. Attenuating the response of ample reserves to deposits removes the risk of instability at a modest cost in terms of rate deviations. Simulations with stable roots show that reserves first reach ample earlier and at a higher level than expected by the demand of reserves alone. However, the supply of reserves may decrease further thereafter, at least relative to trend, as liquid deposits remain elevated in the transition period.

Keywords: monetary policy; liquid deposits; ample reserves; policy rate (search for similar items in EconPapers)
JEL-codes: E02 E50 E52 E58 (search for similar items in EconPapers)
Pages: 18
Date: 2026-07-15
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... ers/2026/wp26-34.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:103530

Ordering information: This working paper can be ordered from

DOI: 10.21799/frbp.wp.2026.34

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().