Keywords: Liquidity effect, federal funds market
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.
Full paper (212 KB PDF)
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Last update: October 19, 2004