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The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets
Author(s) -
CHEN HAN,
CLOUSE JIM,
IHRIG JANE,
KLEE ELIZABETH
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12322
Subject(s) - monetary policy , normalization (sociology) , interest rate , excess reserves , federal reserve economic data , economics , money market , term (time) , federal funds , monetary economics , business , finance , reserve requirement , quantitative easing , central bank , physics , quantum mechanics , anthropology , sociology
We develop a model to analyze monetary policy implementation with multiple Federal Reserve liabilities and superabundant reserves. The analysis demonstrates the Federal Reserve's tools including interest on excess reserves (IOER), overnight reverse repurchase agreements (ON RRP), and term deposits should allow the Federal Reserve to raise the short‐term interest rates to any desired level. We find the contribution of each the increase in the IOER and ON RRP offering rates in firming money market rates suggested by the data during the December 2015 policy tightening event is remarkably similar to the effect of each tool implied by the calibrated model.