The Optimal Supply of Central Bank Reserves under Uncertainty

Gara Afonso, Gabriele La Spada, Thomas Mertens and John Williams

No 1077, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper provides an analytically tractable theoretical framework to study the optimal supply of central bank reserves when the demand for reserves is uncertain and nonlinear. We fully characterize the optimal supply of central bank reserves and associated market equilibrium. We find that the optimal supply of reserves under uncertainty is greater than that absent uncertainty. With a sufficient degree of uncertainty, it is optimal to supply a level of reserves that is abundant (on the flat portion of the demand curve). The model captures the empirical observation that the variability of interest rate spreads depends on reserves supply.

Keywords: monetary policy implementation; rate control; federal funds rate (search for similar items in EconPapers)
JEL-codes: E41 E42 E52 E58 (search for similar items in EconPapers)
Pages: 36
Date: 2023-11-01
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
Note: Revised December 2023.
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Working Paper: The Optimal Supply of Central Bank Reserves under Uncertainty (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:97290

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DOI: 10.59576/sr.1077

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