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Finance and Economics Discussion Series
Finance and Economics Discussion Series logo links to FEDS home page The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations
Seth Carpenter and Selva Demiralp

Abstract: We use forecast errors made by the Federal Reserve while preparing open market operations to identify a liquidity effect at a daily frequency in the federal funds market. Unlike Hamilton (1997), we find a liquidity effect on many days of the reserve maintenance period besides settlement day. The effect is non-linear; large changes in supply have a measurable effect, but small changes do not. In addition, a higher aggregate level of reserve balances in the banking system is associated with a smaller liquidity effect during the maintenance period but a larger liquidity effect on the last days of the period.

Keywords: Liquidity effect, federal funds market

Full paper (212 KB PDF)

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Last update: October 19, 2004