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slides15 - Chapter 15 The Fed-Funds Market(and other Fed...

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[Notes on Mishkin Ch.15 - P.1] Chapter 15: The Fed-Funds Market (and other Fed policy tools) • Market between banks = Buying and selling reserve balances held at the Fed. - Overnight loans, unsecured, OTC. Symbol: i ff = Fed Funds rate. - Key point: Trading does not change total reserves. Supply of Reserves • Regular components (Textbook treatment): - Supply through open market operations: NBR = Non-borrowed. - Supply through regular discount loans: BR = borrowed at interest rate i d , expire automatically, provided to banks on demand. Write as supply function BR = BR ( i ff i d ) . Elastic supply function for i ff i d . Zero for i ff < i d . • Regular reserve supply as function of the Fed Funds rate: R s ( i ff ) = NBR + BR ( i ff i d ) - Vertical for i ff < i d . Kink at i ff = i d . Flat for i ff i d .
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[Notes on Mishkin Ch.15 - P.2] Special Issues: Fed Responses to the Mortgage Crisis Special lending operations: - TAF loans (Dec’07-Mid’10). Term = 28 days, amounts set by the Fed. => inelastic loan supply – just like NBR. Adds to supply of reserves. - Loans to non-banks similar => inelastic supply of reserves. => Complete reserve supply as function of the Fed Funds rate: R s ( i ff ) = NBR + SpecialLending + BR ( i ff i d ) - Vertical for i ff < i d . Kink at i ff = i d . Flat for i ff i d - To keep notation simple, subsume special lending into NBR. Then Mishkin’s equations remain valid, just with modified interpretation.) - Note: Fed may choose to make NBR interest-elastic (fixed for now). • Interest on Reserves
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slides15 - Chapter 15 The Fed-Funds Market(and other Fed...

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