Stop Believing in Reserves

Abstract

We present a new channel of quantitative tightening (QT): the supply of money held by non-banks. Calibrating a structural model to the current monetary tightening cycle, we show that this new channel of QT implies a larger Federal Reserve balance sheet with more short-term liquidity provision than a balance sheet that considers only bank reserve demand. We argue that ignoring the supply of money held by non-banks could lead to loss of interest rate control by the Federal Reserve.

Keywords: monetary policy effects, quantitative tightening, reserves, overnight reverse repo facility, shadow banks

JEL Classification: G2, E4, E5