The federal funds market, excess reserves, and unconventional monetary policy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Following the bankruptcy of Lehman Brothers, interbank borrowing and lending dropped, whereas reserve holdings of depository institutions skyrocketed, as the Fed injected liquidity into the U.S. banking sector. This paper introduces bank liquidity risk and limited market participation into a real business cycle model with ex ante identical financial intermediaries and shows, in an analytically tractable way, how interbank trade and excess reserves emerge in general equilibrium. Investigating the role of the federal funds market and unconventional monetary policy for the propagation of aggregate real and financial shocks, I find that federal funds market participation is irrelevant in response to standard supply and demand shocks, whereas it matters for "uncertainty shocks", i.e. mean-preserving spreads in the cross-section of liquidity risk. Liquidity injections by the central bank can absorb the effects of financial shocks on the real economy, although excess reserves might increase and federal funds might be crowded out, as a side effect. Terms of use: Documents in

Is the Growth Effect of Financial Development Conditional on Technological Innovation?

“…This is because the interest on reserves acts as 'a subsidy' on bank deposits thus encouraging a higher deposit rate (see also Dutkowsky and VanHoose, 2013, Ireland 2014, Güntner 2015. Since, the e¤ect of the interest on reserves on total reserves is also positive, @e r t =@R ior t > 0, a higher interest on reserves will also reduce the reserves available for credit.…”

Austerity, Assistance and Institutions: Lessons from the Greek Sovereign Debt Crisis

“…19 Following most of the related literature (see e.g. Garin ( 2015 ), Guntner ( 2015 ), etc), we assume that firms can borrow up to a fraction of their capital: where the parameter ρ l ≥ 0 measures the tightness of borrowing conditions.…”

Gauging the Impact of Payment System Innovations on Financial Intermediation: Novel Empirical Evidence from Indonesia

“…Another interesting result is also reported by studies that employed the U.S. data. Güntner (2015) On the retail payment systems level, Wang and Wolman (2016) take the U.S. data from various locations in the country. They impose a nominal threshold whereby customers may use debit cards above that threshold and use cash below that threshold.…”

“…Another interesting result is also reported by studies that employed US data. Güntner (2015) points out that the excess reserves level in the US data is not related to loan supply. The level of excess reserves only crowds out the money market.…”

“…Therefore, an empirical framework of analysis that is based on solely price information may not be adequate to provide a comprehensive answer to our research questions. Potentially, alternative approaches, such as the one by Güntner (2015) who employs the dynamic stochastic general equilibrium (DSGE) model to assess the excess reserves, could have also been used. It should be stressed, however, that this approach may not incorporate payment flows and payment system regulations that restrict the value of customer transactions in the LVPS that we want to investigate.…”