Voluntary Reserve Targets

Garth Baughman and Francesca Carapella

No 2018-032, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper updates the standard workhorse model of banks' reserve management to include frictions inherent to money markets. We apply the model to study monetary policy implementation through an operating regime involving voluntary reserve targets (VRT). When reserves are abundant, as is the case following the unconventional policies adopted during the recent financial crisis, operating regimes based on reserve requirements may lead to a collapse in interbank trade. We show that, no matter the relative abundance of reserves, VRT encourage market activity and support the central bank's control over interest rates. In addition to this characterization, we consider (i) the impact of routine and non-routine liquidity injections by the central bank on market outcomes and (ii) a comparison with the implementation framework currently adopted by the Federal Reserve. Overall, we show that a VRT framework may provide several advantages over other frameworks.

Keywords: Monetary policy; Reserve targets; Money markets (search for similar items in EconPapers)
JEL-codes: E42 E43 E44 E51 E52 E58 G21 G28 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2018-05-07
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://www.federalreserve.gov/econres/feds/files/2018032pap.pdf (application/pdf)

Related works:
Journal Article: Voluntary Reserve Targets (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2018-32

DOI: 10.17016/FEDS.2018.032

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