Figure 1: The Demand Curve for Bank Reserves
This figure shows the relationship between overnight rates and
reserves held at the Federal Reserve. The red line denotes the reserve
demand curve and the blue line denotes reserve supply as of April 2026
($2.9 trillion). $X denotes the maximum level of reserves consistent
with an ample reserves environment. To the right of $X is abundant
reserves. The IORB rate is the interest rate on reserve balances at
which banks can lend to the Fed. The ON RRP rate is the offering rate at
the Overnight Reverse Repo Facility at which non-banks can lend to the
Fed. The Standing Repo rate is the rate at which institutions can borrow
from the Fed.
This chart illustrates the Overnight rate as a function of demand and supply of reserves. The vertical axis displays three key interest rate levels: the ON RRP (Overnight Reverse Repurchase Agreement) rate at the bottom, the IORB (Interest on Reserve Balances) rate in the middle, and the Standing Repo rate at the top. The horizontal axis measures the quantity of bank reserves in the system. The red demand curve slopes downward from left to right, starting near the Standing Repo rate, falling steeply through the middle, and flattening out near the ON RRP rate, showing that as more reserves become available, the overnight rate falls. The blue supply curve appears as a vertical line at $2.9 trillion, representing a fixed quantity of reserves provided by the Federal Reserve. Where the demand curve intersects the supply line at approximately $2.9 trillion determines the market overnight rate, which appears to be at or near the ON RRP rate level. There is an additional dashed vertical line in grey to the left of $2.9 trillion, marked as $X, which denotes the minimum level of reserves consistent with an ample reserve framework.
Figure 2: Evolution of the Fed’s Balance Sheet
This figure displays selected items on the Federal Reserve’s balance
sheet: Treasury securities (red line), bank reserves (orange line), and
non-bank reserves (investments at the ON RRP, blue line). Quantitative
tightening began on June 1, 2022 and ended on December 1, 2025. Source:
Federal Reserve Board H.4.1., Federal Reserve Bank of New York.
This figure displays the evolution of selected items on the Federal Reserve's balance sheet from the first quarter of 2022 through the end of 2025. The chart tracks three key components measured in billions of dollars on the right vertical axis. The red line at the top represents Treasury securities held by the Federal Reserve, starting at approximately $5,500-$6,000 billion and gradually declining over the period to around $4,000 billion. The orange line in the middle shows bank reserves on a weekly basis, which begins at roughly $3,000-$3,500 billion, remains relatively stable through 2024, then declines moderately to around $3,000 billion by 2025. The blue line at the bottom tracks Overnight Reverse Repurchase Agreement facility (ON RRP) balances, starting at approximately $2,000 billion in early 2022, maintaining that level briefly, then declining sharply throughout 2023 and 2024 to near zero by 2025. Two vertical dashed lines mark the beginning of quantitative tightening in mid-2022 and the end of quantitative tightening in late 2025.
Figure 3: Dealer Positions of Treasury Securities & Repo Financing
Volumes
This figure displays the net position of Treasury coupons and
Treasury Inflation Protected Securities (red line) and overnight
repurchase (repo) volumes (blue line) on primary dealers’ balance
sheets. Repo volumes are the sum of overnight and continuing repo
positions against Treasury security collateral in the cleared bilateral,
tri-party, General Collateralized Financing, and uncleared bilateral
segments. Quantitative tightening began on June 1, 2022 and ended on
December 1, 2025. Source: Primary Dealer Statistics from the Federal
Reserve Bank of New York.
This figure displays the net position of Treasury coupons and Treasury Inflation Protected Securities held by primary dealers (red line, measured on the left axis) alongside overnight repurchase agreement volumes (blue line, measured on the right axis in billions) from the first quarter of 2022 through the end of 2025. The red line representing dealer net Treasury securities positions starts at approximately $50-$75 billion in early 2022 and shows a steady upward trend throughout the entire period, reaching around $350-$400 billion by late 2025. The blue line tracking Secured Overnight Financing Rate (SOFR) volumes begins at roughly $1,250 billion in early 2022, increases slowly through 2023 and 2024 and then shows a sharper increase starting in 2025, climbing to approximately $2,500-$2,750 billion by the end of the period. Two vertical dashed lines mark the beginning of quantitative tightening in mid-2022 and the end of quantitative tightening in late 2025.
Figure 4: Auctioned Treasury Securities Financed in the Repo Market
Figure 4 displays the monthly volume of
auction-financed Treasury coupon securities in the
Delivery-versus-Payment (DVP) repo market from 2021 to 2025, measured in
billions of dollars. The blue area represents securities financed
through the Fixed Income Clearing Corporation (FICC), while the red area
shows direct auction takeup. The data indicates a clear shift in how
these securities are being financed, with participants increasingly
utilizing FICC clearing services rather than outright financing. Source:
OFR Repo Collection, Repo Mapper , Treasury Direct.
This stacked area chart displays the monthly volume of auction-financed Treasury coupon securities in the Delivery-versus-Payment (DVP) repo market from 2021 to 2025, measured in billions of dollars. The chart consists of two components: the blue area at the bottom represents securities financed through the Fixed Income Clearing Corporation (FICC), while the red area at the top shows direct auction takeup. The total combined volume has remained relatively stable around $375-$380 billion throughout the entire period, with a temporary dip to around $300 billion in late 2022 and early 2023. The blue area starts at around $150-$180 billion in 2021 and increases in 2024 to around $250-$300 billion by the end of 2025, showing a bit more volatility than auction takeup.
Figure 5: Auctioned Treasury Bills Financed in the Repo Market
Figure 5 displays the monthly volume of
auction-financed Treasury bills in the DVP repo market from 2021 to
2025, measured in billions of dollars. The blue area represents bills
financed through FICC, while the red area shows direct auction takeup.
The chart demonstrates that only a small fraction of Treasury bills are
financed in the repo market through FICC. The dominant red area
indicates that the vast majority of auctioned Treasury bills are taken
up directly rather than being financed through the repo market. Source:
Source: OFR Repo Collection, Repo Mapper , Treasury Direct.
This stacked area chart displays the monthly volume of auction-financed Treasury bills in the Delivery-versus-Payment (DVP) repo market from 2021 to 2025, measured in billions of dollars. The chart consists of two components: the blue area at the bottom represents bills financed through the Fixed Income Clearing Corporation (FICC), while the red area at the top shows direct auction takeup. The red area representing direct auction takeup was at levels around $1,000-$1,200 billion in early 2021, temporarily dropped to around $800 billion in 2022 and then increased significantly to levels around $1,700-$2,400 starting in 2023. The chart shows considerable volatility with noticeable spikes and fluctuations in the red area. The blue area representing FICC financing remains relatively small and stable throughout the period, starting at less than $100 billion and increasing to $300 billion by the end of 2025.
Figure 6: Treasury Securities Financed in the Repo Market by Hedge Funds
Figure 6 displays the monthly volume of hedge
fund auction-financed Treasury securities in the DVP repo market from
2021 to 2025, measured in billions of dollars. The blue area represents
securities financed through FICC, while the red area shows direct
auction takeup by investment funds. This pattern provides empirical
support for modeling levered investors as hedge fund-type participants
who rely heavily on the repo market to finance their Treasury securities
holdings: the data shows that hedge funds systematically finance their
auction purchases through the repo market, with an increasing proportion
utilizing centralized clearing through FICC, making them the natural
real-world counterpart to the levered investors in our theoretical
framework. Source: OFR Repo Collection, Repo Mapper , Treasury Direct.
This stacked area chart displays the monthly volume of hedge fund auction-financed Treasury securities in the Delivery-versus-Payment (DVP) repo market from 2021 to 2025, measured in billions of dollars. The chart consists of two components: the blue area at the bottom represents securities financed through the Fixed Income Clearing Corporation (FICC), while the red area at the top shows direct auction takeup by investment funds. In 2021, the total volume starts at approximately $200 billion dollars, with FICC financing comprising roughly $20-$30 billion and direct auction takeup accounting for about $170-$180 billion. Both components decrease a touch by late 2022 and then grow again until the end of 2025. By 2025, the total volume has increased to approximately $240-$260 billion dollars, with FICC financing growing to around $100 billion and direct auction takeup reaching approximately $140-$160 billion. The chart reveals some fluctuations in both components
Figure 7: Money Market Fund Holdings by Investment Type
This figure displays daily money market fund (MMF) holdings across
four investment categories from February 2021 through July 2025,
measured in trillions of dollars. Treasury bills (dark green) declined
from over $2.2 trillion in early 2021 to below $1 trillion by mid-2023,
before surging to nearly $3 trillion by late 2024. The Overnight Reverse
Repo (ON RRP) facility (purple) rose sharply from negligible levels in
2021 to peak around $2 trillion in 2022-2023, then declined
precipitously to near zero by 2024 as money funds shifted to
higher-yielding alternatives. Treasury repo (red) exhibited steady
growth from approximately $0.5 trillion to $1.5 trillion over the
period, while Treasury coupon securities (blue) remained relatively
stable at low levels around $0.1-0.2 trillion throughout. Source: SEC
N-MFP filings.
This figure displays daily money market fund (MMF) holdings across four investment categories from January 2021 through July 2025, measured in trillions of dollars. The dark green line representing Treasury bills shows a notable decline from over $2.2 trillion dollars in early 2021 to below $1 trillion by mid-2023, before surging dramatically to nearly $3 trillion by late 2024 and then declining again to levels around 2.3 trillion. The purple line tracking Overnight Reverse Repo (ON RRP) balances exhibits sharp fluctuations, rising from negligible levels in 2021 to a peak around $2 trillion in 2022-2023, then declining precipitously to levels below $250 billion by the end of 2024. The red line showing Treasury repo was at around $0.5 trillion at the beginning of 2021, declined somewhat in 2022 and then grew consistently to$1.5 trillion in mid-2025. The blue line representing Treasury coupon securities remained relatively stable at low levels throughout, fluctuating between levels close to zero and $0.25 trillion dollars with minimal variation.
Figure 8: Bank Net Lending in Overnight Treasury Repo
This figure shows bank net lending (lending minus borrowing) in the
overnight Treasury repo market from January 2021 through March 2026. The
green area (right axis) displays net lending volume in billions of
dollars, with black dots marking month-end observations. The blue line
(left axis) tracks the volume-weighted mean lending rate relative to the
Interest on Reserve Balances (IORB) rate in basis points. Source: OFR
Repo Collection, Repo Mapper .
This figure shows bank net lending (lending minus borrowing) in the overnight Treasury repo market from January 2021 through March 2026. The chart displays two key metrics: the green area measured on the right axis represents net lending volume in billions of dollars, with black dots marking month-end observations, while the blue line measured on the left axis tracks the volume-weighted mean lending rate relative to the Interest on Reserve Balances (IORB) rate in basis points. The green area shows that net lending volume started negative in early 2021, around negative $100 billion, with significant daily volatility. The volume gradually shifted toward zero around late 2024 and then turned increasingly positive, with volumes rising steadily. By 2025, net lending increased substantially, frequently exceeding $100 billion, with the month-end black dots showing consistent positive positioning. The blue line indicating the rate spread relative to IORB shows considerable fluctuation throughout the period, initially hovering near or slightly above zero in 2021-2022, then decreasing to levels around -15 basis points with spikes reaching down to -40 basis points. It gradually increases over the horizon, reaching positive levels in late 2025 before dropping below zero again at the end of the horizon in March 2026.
Figure 9: Deposits and the Policy Rate
(a) Deposit Rate
(b) Deposit Spread
(c) Deposit Allocation
This figure shows how key deposit variables change with the policy
rate \(R\). The top panel (a) displays
the deposit rate at banks \(i_{d^b}\)
(the orange line) and the deposit rate at MMFs \(i_{d^m}\) (the blue dashed line). The
middle panel (b) displays the spread between the MMF deposit rate and
the bank deposit rate. The positive slope indicates that the
pass-through of an increase in the policy rate \(R\) is larger for MMF deposit rates than it
is for bank deposit rates. The bottom panel (c) displays the deposit
allocation at banks \(d^b\) (the orange
line) and MMFs \(d^m\) (the blue dashed
line).
(a) Deposit Rate
| R (%) | Bank Deposit Rate (%) | MMF Deposit Rate (%) |
|---|---|---|
| 0.041 | 0.002 | 0.038 |
| 0.042 | 0.003 | 0.04 |
| 0.044 | 0.005 | 0.041 |
| 0.046 | 0.007 | 0.043 |
| 0.048 | 0.009 | 0.045 |
| 0.049 | 0.01 | 0.047 |
| 0.051 | 0.012 | 0.048 |
| 0.053 | 0.014 | 0.05 |
| 0.055 | 0.015 | 0.052 |
| 0.057 | 0.017 | 0.054 |
| 0.058 | 0.019 | 0.055 |
| 0.06 | 0.021 | 0.057 |
| 0.062 | 0.022 | 0.059 |
| 0.064 | 0.024 | 0.061 |
| 0.065 | 0.026 | 0.063 |
| 0.067 | 0.028 | 0.064 |
| 0.069 | 0.029 | 0.066 |
| 0.071 | 0.031 | 0.068 |
| 0.072 | 0.033 | 0.07 |
| 0.074 | 0.034 | 0.071 |
| 0.076 | 0.036 | 0.073 |
| 0.078 | 0.038 | 0.075 |
| 0.08 | 0.04 | 0.077 |
| 0.081 | 0.041 | 0.078 |
| 0.083 | 0.043 | 0.08 |
| 0.085 | 0.045 | 0.082 |
| 0.087 | 0.047 | 0.084 |
| 0.088 | 0.048 | 0.086 |
| 0.09 | 0.05 | 0.087 |
| 0.092 | 0.052 | 0.089 |
| 0.094 | 0.053 | 0.091 |
| 0.095 | 0.055 | 0.093 |
| 0.097 | 0.057 | 0.094 |
| 0.099 | 0.059 | 0.096 |
(b) Deposit Spread
| R (%) | Spread (%) |
|---|---|
| 0.041 | 0.036 |
| 0.042 | 0.036 |
| 0.044 | 0.036 |
| 0.046 | 0.036 |
| 0.048 | 0.036 |
| 0.049 | 0.036 |
| 0.051 | 0.036 |
| 0.053 | 0.036 |
| 0.055 | 0.036 |
| 0.057 | 0.037 |
| 0.058 | 0.037 |
| 0.06 | 0.037 |
| 0.062 | 0.037 |
| 0.064 | 0.037 |
| 0.065 | 0.037 |
| 0.067 | 0.037 |
| 0.069 | 0.037 |
| 0.071 | 0.037 |
| 0.072 | 0.037 |
| 0.074 | 0.037 |
| 0.076 | 0.037 |
| 0.078 | 0.037 |
| 0.08 | 0.037 |
| 0.081 | 0.037 |
| 0.083 | 0.037 |
| 0.085 | 0.037 |
| 0.087 | 0.037 |
| 0.088 | 0.037 |
| 0.09 | 0.037 |
| 0.092 | 0.037 |
| 0.094 | 0.037 |
| 0.095 | 0.037 |
| 0.097 | 0.038 |
| 0.099 | 0.038 |
(c) Deposit Allocation
| R (%) | Bank Deposits ($T) | MMF Deposits ($T) |
|---|---|---|
| 0.041 | 15.632 | 3.452 |
| 0.042 | 15.618 | 3.466 |
| 0.044 | 15.605 | 3.48 |
| 0.046 | 15.591 | 3.494 |
| 0.048 | 15.577 | 3.508 |
| 0.049 | 15.563 | 3.522 |
| 0.051 | 15.549 | 3.536 |
| 0.053 | 15.535 | 3.55 |
| 0.055 | 15.521 | 3.564 |
| 0.057 | 15.507 | 3.577 |
| 0.058 | 15.493 | 3.591 |
| 0.06 | 15.48 | 3.605 |
| 0.062 | 15.466 | 3.619 |
| 0.064 | 15.452 | 3.633 |
| 0.065 | 15.438 | 3.646 |
| 0.067 | 15.424 | 3.66 |
| 0.069 | 15.411 | 3.674 |
| 0.071 | 15.397 | 3.688 |
| 0.072 | 15.383 | 3.701 |
| 0.074 | 15.37 | 3.715 |
| 0.076 | 15.356 | 3.729 |
| 0.078 | 15.342 | 3.742 |
| 0.08 | 15.329 | 3.756 |
| 0.081 | 15.315 | 3.77 |
| 0.083 | 15.301 | 3.783 |
| 0.085 | 15.288 | 3.797 |
| 0.087 | 15.274 | 3.811 |
| 0.088 | 15.26 | 3.824 |
| 0.09 | 15.247 | 3.838 |
| 0.092 | 15.233 | 3.851 |
| 0.094 | 15.22 | 3.865 |
| 0.095 | 15.206 | 3.878 |
| 0.097 | 15.193 | 3.892 |
| 0.099 | 15.179 | 3.905 |
Figure 10: Reserves, ON RRP Investment, and the Policy Rate
This figure shows how reserve balances (the blue dashed line) and ON
RRP investment (the solid orange line) change with the policy rate \(R\), holding fixed the spread to \(r\). As the policy rate \(R\) increases, \(i_{d^{m}}\) increases more than \(i_{d^{b}}\). This causes households to
allocate more deposits to MMFs and less deposits to the commercial bank.
Holding constant the size of the central bank’s balance sheet, the
demand for funding in the repo market is unchanged, so MMFs place these
extra deposits at the ON RRP facility. When the reserve constraint for
the commercial bank is not binding, the bank continues to lend at the
optimal loan amount, and the reduction in bank deposits is matched with
a reduction in reserves
| R (%) | Reserves ($T) | ON RRP ($T) |
|---|---|---|
| 0.041 | 3.311 | 1.136 |
| 0.042 | 3.297 | 1.154 |
| 0.044 | 3.284 | 1.172 |
| 0.046 | 3.27 | 1.19 |
| 0.048 | 3.256 | 1.208 |
| 0.049 | 3.242 | 1.226 |
| 0.051 | 3.228 | 1.243 |
| 0.053 | 3.214 | 1.261 |
| 0.055 | 3.2 | 1.279 |
| 0.057 | 3.186 | 1.296 |
| 0.058 | 3.172 | 1.314 |
| 0.06 | 3.159 | 1.332 |
| 0.062 | 3.145 | 1.349 |
| 0.064 | 3.131 | 1.367 |
| 0.065 | 3.117 | 1.384 |
| 0.067 | 3.103 | 1.402 |
| 0.069 | 3.09 | 1.419 |
| 0.071 | 3.076 | 1.437 |
| 0.072 | 3.062 | 1.454 |
| 0.074 | 3.049 | 1.472 |
| 0.076 | 3.035 | 1.489 |
| 0.078 | 3.021 | 1.507 |
| 0.08 | 3.008 | 1.524 |
| 0.081 | 2.994 | 1.541 |
| 0.083 | 2.98 | 1.558 |
| 0.085 | 2.967 | 1.576 |
| 0.087 | 2.953 | 1.593 |
| 0.088 | 2.939 | 1.61 |
| 0.09 | 2.926 | 1.627 |
| 0.092 | 2.912 | 1.644 |
| 0.094 | 2.899 | 1.661 |
| 0.095 | 2.885 | 1.679 |
| 0.097 | 2.872 | 1.696 |
| 0.099 | 2.858 | 1.713 |
Figure 11: ON RRP Investment and the Federal Reserve’s Balance Sheet
This figure shows how ON RRP investment changes with the size of the
Federal Reserve’s balance sheet \(b^{L,CB}\). The dashed vertical line
denotes \((p^{L}\times\widetilde{b^{CB}})\), the
nominal critical threshold of the Federal Reserve’s balance sheet where
the repo market switches from “abundant liquidity” (right of the line)
to “ample liquidity” (left of the line). In abundant liquidity
equilibria, ON RRP investment declines with the size of the balance
sheet until it reaches zero, whereas in ample liquidity equilibria, ON
RRP investment is constant at zero.
| Nominal Value of Fed's Secuities ($T) | ON RRP ($T) |
|---|---|
| 5.261 | 1.347 |
| 4.846 | 0.932 |
| 4.432 | 0.517 |
| 4.017 | 0.103 |
| 3.922 | 0.007 |
| 3.877 | 0 |
| 3.833 | 0 |
| 3.788 | 0 |
| 3.744 | 0 |
| 3.7 | 0 |
| 3.655 | 0 |
| 3.611 | 0 |
| 3.567 | 0 |
| 3.522 | 0 |
| 3.478 | 0 |
| 3.433 | 0 |
| 3.389 | 0 |
| 3.345 | 0 |
| 3.297 | 0 |
| 2.817 | 0 |
| 2.337 | 0 |
Figure 12: The Repo Rate and the Federal Reserve’s Balance Sheet
Figure 12 shows how the repo rate \(\rho\) changes with the size of the Federal
Reserve’s balance sheet \(b^{L,CB}\).
The dashed vertical line denotes \((p^{L}\times\widetilde{b^{CB}})\), the
nominal critical threshold of the Federal Reserve’s balance sheet where
the repo market switches from “abundant liquidity” (right of the line)
to “ample liquidity” (left of the line). In abundant liquidity
equilibria, the repo rate \(\rho\)
equals the ON RRP rate, whereas in ample liquidity equilibria, the repo
rate increases as the size of the Federal Reserve’s balance sheet
declines.
| Nominal Value of Fed's Secuities ($T) | Repo Rate (%) |
|---|---|
| 5.261 | 0.045 |
| 4.846 | 0.045 |
| 4.432 | 0.045 |
| 4.017 | 0.045 |
| 3.922 | 0.045 |
| 3.877 | 0.045 |
| 3.833 | 0.045 |
| 3.788 | 0.045 |
| 3.744 | 0.045 |
| 3.7 | 0.045 |
| 3.655 | 0.045 |
| 3.611 | 0.045 |
| 3.567 | 0.045 |
| 3.522 | 0.045 |
| 3.478 | 0.045 |
| 3.433 | 0.046 |
| 3.389 | 0.046 |
| 3.345 | 0.046 |
| 3.297 | 0.046 |
| 2.817 | 0.047 |
| 2.337 | 0.048 |
Figure 13: Deposits and the Federal Reserve’s Balance Sheet
Figure 13 shows how deposit allocation
changes with the size of the Fed’s balance sheet \(b^{L,CB}\). In abundant liquidity
equilibria, deposits are unchanged with the size of the Fed’s balance
sheet, whereas in ample equilibria, bank deposits decrease and MMF
deposits increase as the Federal Reserve’s balance sheet decreases,
given the higher rates that MMFs offer relative to bank deposit
rates.
| Nominal Value of Fed's Secuities ($T) | Bank Deposits ($T) | MMF Deposits ($T) |
|---|---|---|
| 5.261 | 15.603 | 3.481 |
| 4.846 | 15.603 | 3.481 |
| 4.432 | 15.603 | 3.481 |
| 4.017 | 15.603 | 3.481 |
| 3.922 | 15.603 | 3.481 |
| 3.877 | 15.566 | 3.518 |
| 3.833 | 15.522 | 3.562 |
| 3.788 | 15.478 | 3.606 |
| 3.744 | 15.434 | 3.65 |
| 3.7 | 15.391 | 3.694 |
| 3.655 | 15.347 | 3.738 |
| 3.611 | 15.303 | 3.782 |
| 3.567 | 15.259 | 3.826 |
| 3.522 | 15.215 | 3.87 |
| 3.478 | 15.171 | 3.914 |
| 3.433 | 15.127 | 3.957 |
| 3.389 | 15.083 | 4.001 |
| 3.345 | 15.039 | 4.045 |
| 3.297 | 14.992 | 4.093 |
| 2.817 | 14.517 | 4.567 |
| 2.337 | 14.044 | 5.04 |
Figure 14: Reserves and the Federal Reserve’s Balance Sheet
Figure 14 shows how reserves change
with the size of the Fed’s balance sheet \(b^{L,CB}\). In abundant liquidity
equilibria, reserves are unchanged with the size of the Fed’s balance
sheet, whereas in ample equilibria, reserves decrease as the Federal
Reserve’s balance sheet decreases, due to the decreasing allocation of
bank deposits from the household.
| Nominal Value of Fed's Secuities ($T) | Reserves ($T) |
|---|---|
| 5.261 | 3.282 |
| 4.846 | 3.282 |
| 4.432 | 3.282 |
| 4.017 | 3.282 |
| 3.922 | 3.282 |
| 3.877 | 3.245 |
| 3.833 | 3.201 |
| 3.788 | 3.157 |
| 3.744 | 3.113 |
| 3.7 | 3.07 |
| 3.655 | 3.026 |
| 3.611 | 2.982 |
| 3.567 | 2.938 |
| 3.522 | 2.894 |
| 3.478 | 2.85 |
| 3.433 | 2.806 |
| 3.389 | 2.762 |
| 3.345 | 2.718 |
| 3.297 | 2.671 |
| 2.817 | 2.196 |
| 2.337 | 1.816 |
Figure 15: Repo Market Capacity vs. Bank Reserve Demand
This figure shows how the level of reserves consistent with the model
thresholds change with the policy rate \(R\). The dashed blue line is the threshold
between abundant and ample liquidity, \(\widetilde{b^{CB}}\), where \(\rho=r\) and \(d^{RRP}=0\). The dotted red line is the
threshold between ample and scarce liquidity, \(\underline{b^{CB}}\), where \(\rho=R\). The shaded region represents
ample liquidity in the repo market. The solid orange line is the
threshold where reserves are equal to the minimum level of reserve
demand. This figure illustrates different types of equilibria when the
policy rate \(R \in [4.0\%, 9.5\%]\).
Starting from a very large balance sheet, if the Fed’s government
securities holdings are larger than the critical threshold \(\widetilde{b^{CB}}\), there is abundant
liquidity in the repo market and excess reserves (above the dashed blue
line). As the Fed reduces its balance sheet beyond \(\widetilde{b^{CB}}\), the repo rate starts
to increase and the repo market has ample liquidity, but banks still
hold excess reserves (between the dashed blue line and the solid orange
line). The dotted red line demonstrates that within this set of
equilibria, reserves can be lower if the Fed is willing to tolerate
higher repo rates. The repo rate equals IORB at the dotted red line;
below this level, liquidity in the repo market is scarce. If the Fed
reduces its balance sheet further, such that the reserve constraint for
banks becomes binding (at the solid orange line), there is both scarce
liquidity in the repo market and scarce reserves, as banks only hold the
minimum level of reserve demand.
| R (%) | Reserves = delta * Bank Deposits ($T) | Reserves at b_CB_tilde ($T) | Reserves at b_CB_underline ($T) | |
|---|---|---|---|---|
| 0.041 | 2.021 | 3.311 | 2.689 | |
| 0.042 | 2.019 | 3.297 | 2.677 | |
| 0.044 | 2.018 | 3.284 | 2.664 | |
| 0.046 | 2.016 | 3.27 | 2.652 | |
| 0.048 | 2.014 | 3.256 | 2.64 | |
| 0.049 | 2.012 | 3.242 | 2.627 | |
| 0.051 | 2.01 | 3.228 | 2.615 | |
| 0.053 | 2.009 | 3.214 | 2.602 | |
| 0.055 | 2.007 | 3.2 | 2.59 | |
| 0.057 | 2.005 | 3.186 | 2.578 | |
| 0.058 | 2.003 | 3.172 | 2.566 | |
| 0.06 | 2.002 | 3.159 | 2.553 | |
| 0.062 | 2 | 3.145 | 2.541 | |
| 0.064 | 1.998 | 3.131 | 2.529 | |
| 0.065 | 1.996 | 3.117 | 2.516 | |
| 0.067 | 1.994 | 3.103 | 2.504 | |
| 0.069 | 1.993 | 3.09 | 2.492 | |
| 0.071 | 1.991 | 3.076 | 2.48 | |
| 0.072 | 1.989 | 3.062 | 2.468 | |
| 0.074 | 1.987 | 3.049 | 2.455 | |
| 0.076 | 1.986 | 3.035 | 2.443 | |
| 0.078 | 1.984 | 3.021 | 2.431 | |
| 0.08 | 1.982 | 3.008 | 2.419 | |
| 0.081 | 1.98 | 2.994 | 2.407 | |
| 0.083 | 1.978 | 2.98 | 2.394 | |
| 0.085 | 1.977 | 2.967 | 2.382 | |
| 0.087 | 1.975 | 2.953 | 2.37 | |
| 0.088 | 1.973 | 2.939 | 2.358 | |
| 0.09 | 1.971 | 2.926 | 2.346 | |
| 0.092 | 1.97 | 2.912 | 2.334 | |
| 0.094 | 1.968 | 2.899 | 2.322 | |
| 0.095 | 1.966 | 2.885 | 2.31 | |
| 0.097 | 1.964 | 2.872 | 2.298 | |
| 0.099 | 1.963 | 2.858 | 2.285 |
Figure E.1: Reserve Levels under Balance Sheet Critical Values when d𝒮/dR > 0
This figure shows the level of reserves when reserves are equal to
the minimum level of reserve demand (solid orange line), when the Fed’s
government bond holdings are equal to \(\widetilde{b^{L,cb}}\) (dashed blue line),
and when the Fed’s government bond holdings are equal to \(\underline{b^{L,cb}}\) (dotted red line) –
all under the alternative assumption that the loan rate increases faster
than IORB, i.e. \(d\mathcal{S}/dR>0\). The interpretation
of the thresholds is identical to that in Figure 15. Note
that the flat portion of the dotted red line lies below the solid orange
line. This is expected since the orange line represents \({m^{r}}=\delta d^{b}\) where \(d^{b}\) is from the abundant
liquidity/reserve regime where \(\rho=r\). The flat portion of the dotted
red line coincides with an alternative \(\widehat{m^{r}} = \delta \widehat{d^{b}}\)
where \(\widehat{d^{b}}\) is from the
marginal scarce liquidity/reserve regime where \(\rho=R\). Since the pass-through to \(i_{d^{b}}\) is less than that of \(i_{d^{m}}\), we know that \(\widehat{d^{b}} <d^{b}\) and therefore
immediately that \(\widehat{m^{r}}=\delta
\widehat{d^{b}}< \delta d^{b} = {m^{r}}\).
| R (%) | Reserves = delta * Bank Deposits ($T) | Reserves at b_CB_tilde ($T) | Reserves at b_CB_underline ($T) | |
|---|---|---|---|---|
| 0.045 | 2.017 | 3.334 | 2.715 | |
| 0.046 | 2.016 | 3.31 | 2.692 | |
| 0.047 | 2.015 | 3.286 | 2.669 | |
| 0.047 | 2.014 | 3.263 | 2.647 | |
| 0.048 | 2.013 | 3.239 | 2.624 | |
| 0.049 | 2.013 | 3.216 | 2.601 | |
| 0.05 | 2.012 | 3.192 | 2.578 | |
| 0.051 | 2.011 | 3.169 | 2.555 | |
| 0.052 | 2.01 | 3.145 | 2.533 | |
| 0.052 | 2.009 | 3.122 | 2.51 | |
| 0.053 | 2.009 | 3.098 | 2.487 | |
| 0.054 | 2.008 | 3.075 | 2.464 | |
| 0.055 | 2.007 | 3.051 | 2.441 | |
| 0.056 | 2.006 | 3.028 | 2.419 | |
| 0.056 | 2.005 | 3.004 | 2.396 | |
| 0.057 | 2.004 | 2.981 | 2.373 | |
| 0.058 | 2.004 | 2.957 | 2.35 | |
| 0.059 | 2.003 | 2.934 | 2.327 | |
| 0.06 | 2.002 | 2.91 | 2.305 | |
| 0.061 | 2.001 | 2.887 | 2.282 | |
| 0.061 | 2 | 2.863 | 2.259 | |
| 0.062 | 1.999 | 2.84 | 2.236 | |
| 0.063 | 1.999 | 2.816 | 2.214 | |
| 0.064 | 1.998 | 2.793 | 2.191 | |
| 0.065 | 1.997 | 2.769 | 2.168 | |
| 0.065 | 1.996 | 2.746 | 2.145 | |
| 0.066 | 1.995 | 2.722 | 2.122 | |
| 0.067 | 1.994 | 2.699 | 2.1 | |
| 0.068 | 1.994 | 2.676 | 2.077 | |
| 0.069 | 1.993 | 2.652 | 2.054 | |
| 0.069 | 1.992 | 2.629 | 2.031 | |
| 0.07 | 1.991 | 2.605 | 2.009 | |
| 0.071 | 1.99 | 2.582 | 1.986 | |
| 0.072 | 1.99 | 2.558 | 1.963 | |
| 0.073 | 1.989 | 2.535 | 1.94 | |
| 0.074 | 1.988 | 2.511 | 1.918 | |
| 0.074 | 1.987 | 2.488 | 1.91 | |
| 0.075 | 1.986 | 2.465 | 1.91 | |
| 0.076 | 1.985 | 2.441 | 1.909 | |
| 0.077 | 1.985 | 2.418 | 1.908 | |
| 0.078 | 1.984 | 2.394 | 1.908 | |
| 0.078 | 1.983 | 2.371 | 1.907 | |
| 0.079 | 1.982 | 2.347 | 1.906 | |
| 0.08 | 1.981 | 2.324 | 1.906 | |
| 0.081 | 1.981 | 2.301 | 1.905 | |
| 0.082 | 1.98 | 2.277 | 1.904 | |
| 0.083 | 1.979 | 2.254 | 1.903 | |
| 0.083 | 1.978 | 2.23 | 1.903 | |
| 0.084 | 1.977 | 2.207 | 1.902 | |
| 0.085 | 1.977 | 2.184 | 1.901 |
Figure E.2: Reserve Levels under Balance Sheet Critical Values when d𝒮/dR < 0
This figure shows the level of reserves when reserves are equal
to the minimum level of reserve demand (solid orange line), when the
Fed’s government bond holdings are equal to \(\widetilde{b^{L,cb}}\) (dashed blue line),
and when the Fed’s government bond holdings are equal to \(\underline{b^{L,cb}}\) (dotted red line) –
all under the alternative assumption that the loan rate increases slower
than IORB, i.e. \(d\mathcal{S}/dR<0\). The interpretation
of the thresholds is identical to that in Figure 15.
| R (%) | Reserves = delta * Bank Deposits ($T) | Reserves at b_CB_tilde ($T) | Reserves at b_CB_underline ($T) |
|---|---|---|---|
| 0.045 | 2.017 | 3.268 | 2.65 |
| 0.049 | 2.012 | 3.26 | 2.645 |
| 0.054 | 2.008 | 3.253 | 2.642 |
| 0.058 | 2.003 | 3.246 | 2.639 |
| 0.063 | 1.999 | 3.239 | 2.636 |
| 0.067 | 1.994 | 3.232 | 2.633 |
| 0.072 | 1.99 | 3.226 | 2.63 |
| 0.076 | 1.985 | 3.219 | 2.628 |
| 0.081 | 1.981 | 3.213 | 2.625 |
| 0.085 | 1.977 | 3.207 | 2.622 |