Demand for Money Notes

1121 reserve requirements pre crisis required reserves

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Unformatted text preview: serve Requirements Pre-Crisis - Required reserves very low, about $50 billion - Partly because of successful reserve-avoidance activity - And partly because Fed found that high levels were not necessary to implement policy effectively - Demand for excess reserves very low and inelastic - No interest on excess reserves - Banks not very concerned about liquidity - Banks held just enough execs reserves to avoid over-drafting their Fed account - Relatively inelastic demand for reserves, combined with random short-term fluctuations in demand for reserves, meant Fed had to engage in frequent OMOs to stabilize the federal funds rated Reserve Requirements Now - Required reserves higher - As a result of increased demand for M1 and resulting increase in reserve requirements - But not the important factor in boosting total reserves - Demand for excess reserves much higher - Fed targeting a very low fed funds rate - Some interest on excess reserves - Banks very concerned about liquidity - Consequently, Fed does not need to engage in OMOs to stabilize the fed funds rate - Rather, the Fed is currently engaging in open market purchases to put downward pressure on long-term interest rates...
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This document was uploaded on 03/28/2014 for the course ECON 244 at Georgetown.

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