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Whither the liquidity effect: the impact of Federal Reserve Open Market Operations in recent years

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Abstract

Previous research indicated that the daily liquidity effect, or the change in the federal funds rate associated with an exogenous change in Fed balances, varies with several factors including the day of the maintenance period. In this paper, we examine the data over the recent period of increased Federal Reserve transparency and find that the liquidity effect stabilized across days of the maintenance period. Rather, the liquidity effect may be a function of the uncertainty about banks' end-of-day balances. Moreover, we find that increased transparency led to a larger liquidity effect on the days prior to an FOMC meeting.

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  • Ruth A. Judson & Elizabeth C. Klee, 2009. "Whither the liquidity effect: the impact of Federal Reserve Open Market Operations in recent years," Finance and Economics Discussion Series 2009-25, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2009-25
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    Cited by:

    1. J�rôme Vandenbussche & Szabolcs Blazsek & Stanley Watt, 2012. "The liquidity and liquidity distribution effects in emerging markets: evidence from Jordan," Applied Financial Economics, Taylor & Francis Journals, vol. 22(3), pages 231-242, February.
    2. Jane E. Ihrig & Ellen E. Meade & Gretchen C. Weinbach, 2015. "Monetary Policy 101: A Primer on the Fed's Changing Approach to Policy Implementation," Finance and Economics Discussion Series 2015-47, Board of Governors of the Federal Reserve System (U.S.).
    3. Judson, Ruth A. & Klee, Elizabeth, 2011. "Big bank, small bank: Monetary policy implementation and banks' reserve management strategies," Journal of Economics and Business, Elsevier, vol. 63(4), pages 306-328, July.
    4. Karolina Puławska, 2022. "Effects of the bank levy introduction on the interbank market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 844-864, January.
    5. John Kandrac & Bernd Schlusche, 2017. "Quantitative Easing and Bank Risk Taking: Evidence from Lending," Finance and Economics Discussion Series 2017-125, Board of Governors of the Federal Reserve System (U.S.).
    6. Elizabeth C. Klee & Zeynep Senyuz & Emre Yoldas, 2016. "Effects of Changing Monetary and Regulatory Policy on Overnight Money Markets," Finance and Economics Discussion Series 2016-084, Board of Governors of the Federal Reserve System (U.S.).
    7. Marquez, Jaime & Morse, Ari & Schlusche, Bernd, 2013. "The Federal Reserve’s balance sheet and overnight interest rates: Empirical modeling of exit strategies," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5300-5315.
    8. Alexander Kroeger & John McGowan & Asani Sarkar, 2018. "The pre-crisis monetary policy implementation framework," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 38-70.
    9. Morten L. Bech & Elizabeth C. Klee & Viktors Stebunovs, 2012. "Arbitrage, liquidity and exit: the repo and federal funds markets before, during, and emerging from the financial crisis," Finance and Economics Discussion Series 2012-21, Board of Governors of the Federal Reserve System (U.S.).
    10. Christopher S. Sutherland, 2017. "What Explains Month-End Funding Pressure in Canada?," Discussion Papers 17-9, Bank of Canada.
    11. Dawid J. van Lill, 2017. "Changes in the Liquidity Effect Over Time: Evidence from Four Monetary Policy Regimes," Working Papers 704, Economic Research Southern Africa.
    12. Jaime R. Marquez & Ari Morse & Bernd Schlusche, 2012. "The Federal Reserve's balance sheet and overnight interest rates," Finance and Economics Discussion Series 2012-66, Board of Governors of the Federal Reserve System (U.S.).
    13. Hao Dong & Yingrong Zheng & Na Li, 2023. "Analysis of Systemic Risk Scenarios and Stabilization Effect of Monetary Policy under the COVID-19 Shock and Pharmaceutical Economic Recession," Sustainability, MDPI, vol. 15(1), pages 1-32, January.
    14. John Kandrac & Bernd Schlusche, 2021. "Quantitative Easing and Bank Risk Taking: Evidence from Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(4), pages 635-676, June.
    15. Signe Krogstrup & Dr. Samuel Reynard & Barbara Sutter, 2012. "Liquidity Effects of Quantitative Easing on Long-Term Interest Rates," Working Papers 2012-02, Swiss National Bank.
    16. Yasuo Hirose & Shinsuke Ohyama, 2010. "Identifying the Effect of the Bank of Japan's Liquidity Facilities: The Case of Commercial Paper Operations During the Financial Turmoil," International Finance, Wiley Blackwell, vol. 13(3), pages 461-483, December.
    17. Kopchak, Seth J., 2011. "The liquidity effect for open market operations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3292-3299.

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    Open market operations; Federal funds market (United States);

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