Voluntary Reserve Targets

49 Pages Posted: 6 Jun 2018 Last revised: 29 Apr 2020

See all articles by Garth Baughman

Garth Baughman

Board of Governors of the Federal Reserve System

Francesca Carapella

Board of Governors of the Federal Reserve System

Date Written: May, 2018

Abstract

This paper updates the standard workhorse model of banks' reserve management to include frictions inherent to money markets. We apply the model to study monetary policy implementation through an operating regime involving voluntary reserve targets (VRT). When reserves are abundant, as is the case following the unconventional policies adopted during the recent financial crisis, operating regimes based on reserve requirements may lead to a collapse in interbank trade. We show that, no matter the relative abundance of reserves, VRT encourage market activity and support the central bank's control over interest rates. In addition to this characterization, we consider (i) the impact of routine and non-routine liquidity injections by the central bank on market outcomes and (ii) a comparison with the implementation framework currently adopted by the Federal Reserve. Overall, we show that a VRT framework may provide several advantages over other frameworks.

JEL Classification: G21, G28, E42, E43, E44, E51, E52, E58

Suggested Citation

Baughman, Garth and Carapella, Francesca, Voluntary Reserve Targets (May, 2018). FEDS Working Paper No. 2018-32, Available at SSRN: https://ssrn.com/abstract=3187702 or http://dx.doi.org/10.17016/FEDS.2018.032

Garth Baughman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Francesca Carapella

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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