Authors: Gara Afonso, Domenico Giannone, Gabriele La Spada, and John C. Williams
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Staff Reports
Scarce, Abundant, or Ample? A Time-Varying Model of the Reserve Demand Curve
Number 1019
May 2022 Revised April 2024
May 2022 Revised April 2024
JEL classification: E41, E43, E52, E58, G21
What level of central bank reserves satiates banks’ demand for liquidity? We estimate the slope of the reserve demand curve in the United States over 2010-21 using a time-varying instrumental-variable approach at the daily frequency. When reserves exceed 12-13 percent of banks’ assets, demand for reserves is satiated: reserves are abundant, and the demand curve is flat; below this threshold, the curve’s slope becomes increasingly negative as reserves decline from ample to scarce. We also find that reserve demand has shifted over time, both vertically and horizontally. Our methodology works well out-of-sample and can assess reserve ampleness in real time.
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