Chapter 10: Conduct of Monetary Policy
2026-03-26 ใน Financial market and institutions 10th global ed. - Frederic MishkinHow Fed actions affect reserves in the banking system
- Every bank have to keep reserves at some ratio(eg. 10% of total reserve) in addition to buy asset or make a loan, which is required by Fed
- Fed has 2 main tools to affect reserve liquidity. They are...
- Open market operations: Fed buys assets(bonds/security) from bank(Primary dealer) and keep the payment in the Fed's balance sheet liability as reserve for the bank which banks can withdraw this reserve anytime they want: So the reserve liquidity is increased.
- Discount loans: when Fed lets the bank borrow the discount loan, reserve liquidity in financial market increased, because bank get more reserve.
The market for reserves and the federal funds rate
- Fed tried to influence the federal fund rate directly by those two prior methods(Open market operations, discount loans)
Demand and supply in the market for reserves
- When demand and supply for the reserves reach equilibrium, the resulting rate is the federal funds rate(iff), the interest rate charged on the loans of these reserves.
Demand curve
- Reserve demand is influenced by two factors
- Required reserve demand : determined by Fed
- Excess reserve demand : the additional reserve bank choose to hold. It is the insurance of deposit outflows.
- The opportunity cost for holding the excess reserve demand calculated by
= the interest rate that bank can get from lending - the interest rate earned on reserve at Fed(ioer)- If Fed fund rate decreases, the raid paid on excess reserve(ioer) isn't changed, the opportunity cost on holding is lower which will increase excess reserve demand
- The opportunity cost for holding the excess reserve demand calculated by
-
Rd is slope down because when fed fund rate(iff) is lower toward ioer, demand increases.
- Reserve demand is influenced by two factors