Excess reserves and monetary policy normalization
Roc Armenter and
Benjamin Lester ()
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Roc Armenter: Federal Reserve Bank of Philadelphia
No 15-35, Working Papers from Federal Reserve Bank of Philadelphia
In response to the Great Recession, the Federal Reserve resorted to several unconventional policies that drastically altered the landscape of the federal funds market. The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. We provide a parsimonious model that captures the key features of the current federal funds market, along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. We use this model to analyze the factors that determine rates and volumes as well as to identify the conditions such that monetary policy implementation will be successful. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding how the market is likely to respond as policymakers raise the target rate.
Keywords: Excess reserves; Federal funds market; Federal funds rate (search for similar items in EconPapers)
JEL-codes: E42 E43 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: Excess Reserves and Monetary Policy Normalization (2015)
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