The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations

36 Pages Posted: 19 Dec 2004

See all articles by Seth B. Carpenter

Seth B. Carpenter

Federal Reserve Board - Department of Monetary Affairs

Selva Demiralp

Koc University - Department of Economics

Date Written: September 2004

Abstract

We use forecast errors made by the Federal Reserve while preparing open market operations to identify a liquidity effect at a daily frequency in the federal funds market. Unlike Hamilton (1997), we find a liquidity effect on many days of the reserve maintenance period besides settlement day. The effect is non-linear; large changes in supply have a measurable effect, but small changes do not. In addition, a higher aggregate level of reserve balances in the banking system is associated with a smaller liquidity effect during the maintenance period but a larger liquidity effect on the last days of the period.

Keywords: Liquidity effect, federal funds market

JEL Classification: E40, E43, E52, E58

Suggested Citation

Carpenter, Seth B. and Demiralp, Selva, The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations (September 2004). FEDS Working Paper No. 2004-61. Available at SSRN: https://ssrn.com/abstract=633221 or http://dx.doi.org/10.2139/ssrn.633221

Seth B. Carpenter (Contact Author)

Federal Reserve Board - Department of Monetary Affairs ( email )

20th and C Streets, NW
Mailstop 60
Washington, DC 20551
United States
202-452-2385 (Phone)
202-452-2301 (Fax)

Selva Demiralp

Koc University - Department of Economics ( email )

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

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