Research
Working Papers
Stop Believing in Reserves with Sriya Anbil (Fed), Alyssa Anderson (Fed), and Romina Ruprecht (Fed) Revise & Resubmit at The Journal of FinanceAbstract
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.Abstract
The Bank of England is currently transitioning from a supply-driven to a demand- driven reserves framework, where most reserves will be borrowed by banks through repurchase (repo) agreements. We build a structural model of the UK financial system with rich interactions between banks and non-bank financial institutions to study how this framework shift affects conventional and unconventional monetary policy transmission. Calibrated to the current quantitative tightening (QT) cycle, the model endogenously produces terminal central bank balance sheet sizes within current estimates of the Preferred Minimum Range of Reserves (PMRR), but suggests that reaching its lower end could generate pressure in secured markets. Conservatively, steady-state reserve balances around £550 billion minimize such pressures. Our quantitative simulations deliver a rule of thumb: each £50 billion reduction in gilt holdings by the central bank raises the secured rate by about 3 basis points and lowers equilibrium reserves by roughly £20 billion.Works in progress
Deregulation and the Geography of Bank Competition
Signaling by Payment: A Theory of Eviction with Graham Lewis (UMN)