Excess Reserves and Monetary Policy Normalization

40 Pages Posted: 6 Oct 2015

See all articles by Roc Armenter

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: September 15, 2015

Abstract

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

JEL Classification: E42, E43, E52, E58

Suggested Citation

Armenter, Roc and Lester, Benjamin R., Excess Reserves and Monetary Policy Normalization (September 15, 2015). FRB of Philadelphia Working Paper No. 15-35. Available at SSRN: https://ssrn.com/abstract=2669404 or http://dx.doi.org/10.2139/ssrn.2669404

Roc Armenter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

HOME PAGE: http://sites.google.com/site/benjaminrlester

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