The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets

Han Chen (), James A. Clouse, Jane E. Ihrig and Elizabeth Klee
Additional contact information
James A. Clouse: https://www.federalreserve.gov/econres/james-a-clouse.htm
Jane E. Ihrig: https://www.federalreserve.gov/econres/jane-e-ihrig.htm

No 2014-83, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper develops a model of the financial system that provides a framework for analyzing monetary policy implementation in a world with multiple Federal Reserve liabilities and a superabundant supply of reserves. The analysis demonstrates that the Federal Reserve's suite of policy tools including interest on excess reserves (IOER), overnight and term reverse repurchase agreements, and term deposits should allow the Federal Reserve to raise the level of short-term interest rates at the appropriate time. The model also demonstrates that these tools could be used in different ways to achieve any given desired level of interest rates. The choices among alternative combinations of tools, of course, have implications for patterns of financial intermediation. Specifically, the quantity of Federal Reserve liabilities held outside of the banking system is shown to depend importantly on the spread between various policy rates.

Keywords: policy normalization; preferred habitat; financial markets; Federal Reserve liabilities; interest on excess reserves (IOER); overnight and term reverse repurchase agreements (ON and term RRP); term deposits (TDF) (search for similar items in EconPapers)
Pages: 38 pages
Date: 2014-10-02
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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Related works:
Journal Article: The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets (2016)
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