Working Papers
Stop Believing In Reserves with Sriya Anbil, Alyssa Anderson, and Romina Ruprecht (2024) Revise & Resubmit at The Journal of Finance
Abstract
We present a new effect of quantitative tightening (QT). While QT affects the supply of reserves held by banks, it also affects the supply of money held by non- banks. Using a structural model that we calibrate to the current monetary tightening cycle, we show that the supply of money held by non-banks affects the capacity of the repo market, and constrains the amount the Federal Reserve can shrink its balance sheet during QT. Ignoring non-bank money supply when determining the optimal amount of short-term liquidity provision could lead to a loss of interest rate control by the Federal Reserve.