The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations

Seth Carpenter and Selva Demiralp

Journal of Money, Credit and Banking, 2006, vol. 38, issue 4, 901-920

Abstract: We use forecast errors made by the Federal Reserve while preparing open market operations to identify a liquidity effect at a daily frequency in the federal funds market. We find a liquidity effect on most days of the reserve maintenance period in addition to settlement day. The effect is nonlinear; large changes in supply more consistently have a measurable effect than do small changes. In addition, a higher aggregate level of reserve balances in the banking system is associated with a smaller liquidity effect during the maintenance period but a larger liquidity effect on the last days of the period.

Date: 2006
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Working Paper: The liquidity effect in the federal funds market: evidence from daily open market operations (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:38:y:2006:i:4:p:901-920

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