Excess Reserves and Monetary Policy Implementation

41 Pages Posted: 30 Nov 2016

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: 2016-11-29

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 under the new implementation framework and to study the effects of changes in the policy rates and other shocks to the economic environment. We also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding the role of the overnight reverse repurchase agreement facility in supporting the federal funds 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 Implementation (2016-11-29). FRB of Philadelphia Working Paper No. 16-33. Available at SSRN: https://ssrn.com/abstract=2877633

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

Register to save articles to
your library

Register

Paper statistics

Downloads
43
Abstract Views
270
PlumX Metrics