Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve

Afonso, Gara; Giannone, Domenico; Spada, Gabriele La; Williams, John C.

doi:10.2139/ssrn.4121823

Cited by 7 publications

(8 citation statements)

References 34 publications

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“…Our model generates a downward sloping reserve demand curve with three main regionsa region of "high" aggregate reserves, a region of "low" aggregate reserves and a smooth transition between the two-that is consistent with the demand curve estimated by Afonso et al (2023). Through the lens of our model, we define the amount of reserves that a central bank supplies to the banking system as abundant, scarce or ample.…”

Section: Introductionsupporting

confidence: 72%

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2023

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We offer a parsimonious model of the reserve demand to study the tradeoffs associated with various monetary policy implementation frameworks. Prior to the 2007-09 financial crisis, many central banks supplied scarce reserves to execute their interest-rate policies. In response to the crisis, central banks undertook quantitative-easing policies that greatly expanded their balance sheets and, by extension, the amount of reserves they supplied. When the crisis and its aftereffects passed, central banks were in a position to choose a framework that has reserves that are (1) abundant-by keeping their balance sheets and reserves at the expanded level; (2) scarce-by vastly decreasing their balance sheets and reserves; or (3) somewhere in between abundant and scarce-by moderately decreasing their balance sheets and reserves. We find that the best policy implementation outcomes are realized when reserves are somewhere between scarce and abundant. This outcome is consistent with the Federal Open Market Committee's 2019 announcement to implement monetary policy in a regime with an ample supply of reserves.

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Section: Introductionsupporting

confidence: 72%

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2023

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“…It is believed that, this contribution is the first that provides a complete set of tools to estimate the demand for reserves and, therefore, facilitate central banks to exercise monetary policy. Our work subsumes previous work by Veyrune et al (2018), El Gemayel et al (2022, and Afonso et al (2022) by embedding their logistic, double exponential, and arctangent approximations to a complete modeling framework.…”

Section: Introductionmentioning

confidence: 74%

“…The demand for reserves describes the rate at which banks are ready to borrow and lend reserve as a function of aggregated reserves in the system. Banks demand reserves for different reasons that could vary with time (Afonso et al, 2022;Hamilton, 1997;Poole, 1968). They seek to keep a certain buffer of reserves to absorb unexpected payments out of their account at the central bank.…”

Section: Background On Central Bank Policy Ratesmentioning

confidence: 99%

“…For f (•) several alternative forms are considered, which are listed in Table 1. Therein, Logistic by Afonso et al (2022), with parameter α changing the location of the curve, and β controlling its spread and ensuring that the resulting sigmoid is decreasing. The coefficients in g(C) are sufficient to control the phase of the arctangent, reducing the required number of parameters from the formulation by Afonso et al (2022).…”

Section: Functional Formmentioning

confidence: 99%

“…El Gemayel et al (2022) use a double exponential instead of a logistic curve. Afonso et al (2022) focus on estimating interest rate elasticity to changes in reserves, based on a locally bi-variate linear approximation of the demand for reserves rather than estimating the curve itself. They later infer the demand curve by imposing an arctangent functional form, but do not assess its goodness of fit to the data.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

Modeling the Reserve Demand to Facilitate Central Bank Operations

Chen

2023

IMF Working Papers

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Reserves were not so Ample after all

Copeland,

Duffie,

Yang

2024

The Quarterly Journal of Economics

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We show that the likelihood of a liquidity crunch in wholesale US dollar funding markets depends on levels of reserve balances at the financial institutions that are the most active intermediaries of these markets. Heightened risk of an imminent liquidity crunch is signaled by significant delays in intra-day payments to these large financial institutions over the prior two weeks. Our study contributes to the broader dialogue surrounding the Federal Reserve’s ongoing quantitative tightening (QT).

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Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve

Cited by 7 publications

References 34 publications

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Modeling the Reserve Demand to Facilitate Central Bank Operations

Reserves were not so Ample after all

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