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Federal Reserve tools for managing rates and reserves

Antoine Martin (), David Skeie (), James McAndrews () and Ali Palida

No 642, Staff Reports from Federal Reserve Bank of New York

Abstract: The Federal Reserve announced in January 2019 that it would maintain an ample supply of reserves amid its balance sheet reduction. We model the impact of reserves on banks? liquidity and balance sheet costs. In competitive general equilibrium, the optimal supply of reserves equates bank deposit rates to the interest rate paid on excess reserves (IOER), consistent with ample reserves. Raising the Fed?s overnight reverse repo rate up to IOER would increase liquidity, expediently reduce the overabundance of reserves, and stabilize the volatility of overnight market rates. Empirical analysis supports our model and can explain recent puzzles in money market rates.

Keywords: overnight reverse repurchases; balance sheet costs; Federal Reserve; liquidity; reserves; banks (search for similar items in EconPapers)
JEL-codes: E5 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fmk and nep-mon
Date: 2013-09-01, Revised 2019-04-01
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Working Paper: Federal Reserve Tools for Managing Rates and Reserves (2015) Downloads
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