Monetary Policy Implementation with an Ample Supply of Reserves

Gara Afonso, Kyungmin Kim, Antoine Martin, Ed Nosal, Simon Potter, and Sam Schulhofer-Wohl
Working Paper 2020-2
January 2020

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Methods of monetary policy implementation continue to change. The level of reserve supply—scarce, abundant, or somewhere in between—has implications for the efficiency and effectiveness of an implementation regime. The money market events of September 2019 highlight the need for an analytical framework to better understand implementation regimes. We discuss major issues relevant to the choice of an implementation regime, using a parsimonious framework and drawing from the experience in the United States since the 2007–09 financial crisis. We find that the optimal level of reserve supply likely lies somewhere between scarce and abundant reserves, thus highlighting the benefits of implementation with what could be called "ample" reserves. The Federal Reserve's announcement in October 2019 that it would maintain a level of reserve supply greater than the one that prevailed in early September is consistent with the implications of our framework.

JEL classification: E42, E58

Key words: federal funds market, monetary policy implementation, ample reserve supply link

Potter worked on this paper while he was at the Federal Reserve Bank of New York and not subsequently. The authors thank Jim Clouse, Spence Krane, Laura Lipscomb, Julie Remache, Zeynep Senyuz, Nate Wuerffel, and Patricia Zobel for useful comments. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Banks of New York, Atlanta, and Chicago; the Board of Governors; or the Federal Reserve System. Any remaining errors are the authors’ responsibility.

Please address questions regarding content to Gara Afonso, Federal Reserve Bank of New York,; Kyungmin Kim, Federal Reserve Board of Governors,; Antoine Martin, Federal Reserve Bank of New York,; Ed Nosal, Federal Reserve Bank of Atlanta,; Simon Potter, Peterson Institute for International Economics; or Sam Schulhofer-Wohl, Federal Reserve Bank of Chicago,

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