The Federal Reserve's balance sheet and overnight interest rates

Jaime R. Marquez, Ari Morse and Bernd Schlusche
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Bernd Schlusche: https://www.federalreserve.gov/econres/bernd-schlusche.htm

No 2012-66, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper provides a comprehensive study of the interplay between the Federal Reserve's balance sheet and overnight interest rates. We model both the supply of and the demand for excess reserves, treating assets of the Federal Reserve as policy tools, and estimate the effects of conventional and unconventional monetary policy on overnight funding rates. We find that, in the current environment with quite elevated levels of reserves, the effect of further monetary policy accommodation on overnight interest rates is limited. Further, assuming a path for removing monetary policy accommodation that is consistent with the FOMC's exit principles, we project that the federal funds rate increases to 70 basis points, settling in a corridor bracketed by the discount rate and the interest rate on excess reserves, as excess reserves of depository institutions decline to near zero.

Date: 2012
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
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http://www.federalreserve.gov/pubs/feds/2012/201266/201266abs.html (text/html)
http://www.federalreserve.gov/pubs/feds/2012/201266/201266pap.pdf (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2012-66

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