Declining Required Reserves, Funds Rate Volatility, and Open Market Operations

43 Pages Posted: 20 Aug 2003

See all articles by Selva Demiralp

Selva Demiralp

Koc University - Department of Economics

Dennis Farley

Board of Governors of the Federal Reserve System - Division of Monetary Affairs

Date Written: June 2003

Abstract

The standard view of the monetary transmission mechanism rests on the central bank's ability to manipulate the overnight interest rate by controlling reserve supply. In the 1990s, there was a significant decline in level of reserve balances in the U.S. accompanied at first by an increase in the funds rate volatility. However, following this initial rise, volatility declined. In this paper, we find evidence of a structural break in volatility. We then estimate a tobit model of the major types of temporary open market operations and conclude that there have been changes in the Desk's reaction function that played a major role in controlling volatility.

Keywords: Required reserves, open market operations, trading Desk

JEL Classification: E0, E4, E5

Suggested Citation

Demiralp, Selva and Farley, Dennis E., Declining Required Reserves, Funds Rate Volatility, and Open Market Operations (June 2003). Available at SSRN: https://ssrn.com/abstract=427762 or http://dx.doi.org/10.2139/ssrn.427762

Selva Demiralp (Contact Author)

Koc University - Department of Economics ( email )

Rumeli Feneri Yolu
Sariyer 80910 Istanbul
Turkey
+212 338 1842 (Phone)

Dennis E. Farley

Board of Governors of the Federal Reserve System - Division of Monetary Affairs

20th and C Streets, NW
Mailstop 72
Washington, DC 20551
United States
202-452-3021 (Phone)
202-452-2301 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
122
Abstract Views
1,146
rank
272,069
PlumX Metrics