Insights / Research Brief•Feb 01, 2022
Liquidity, Liquidity Everywhere, not a Drop to Use: Why Flooding Banks with Central Bank Reserves May Not Expand Liquidity
Viral V. Acharya, Raghuram Rajan
Despite a significant expansion in central bank balance sheets, some markets like the US money market have experienced increasing interest rate volatility, including significant spikes in the repo rate, notably in September 2019 (see Copeland, Duffie and Yang (2021), Correa, Du, and Liao (2021), D’Avernas and Vanderweyer (2021), and Yang (2021)). This apparent disruption in money markets that depend intimately on the availability of liquidity seems puzzling when the cash and central bank reserves held by the US private sector at the end of 2019 were around 4 times their holdings before the Global Financial Crisis in 2007. Greater liquid holdings do not seem to have made markets for liquidity more immune to liquidity shocks. Indeed, markets were disrupted yet again in March 2020 at the onset of the COVID-19 pandemic and the banking system was found short in its ability to accommodate the demand for liquidity. In response, the Federal Reserve expanded its balance sheet yet more (see, for example, Kovner and Martin (2020)), buying financial assets from the private sector and placing large quantities of liquid reserves with it (or promising to do so). Where had all the prior liquidity gone?
Topics:
Monetary Policy
Insights / Research Brief•Jan 12, 2022
Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth
Nittai K. Bergman, David Matsa, Michael Weber
In recent years, and especially in the wake of the Great Recession of 2008-09, the Federal Reserve has paid increasing attention to employment data that go beyond the broad unemployment rate. For example, a low aggregate unemployment rate may mask higher rates for groups that, on average, are not as firmly attached to the labor market, like women, Blacks, and the least educated.
Topics:
Monetary Policy
Insights / Research Brief•Oct 29, 2020
Effective Policy Communication: Targets versus Instruments
In recent decades, and especially since the Great Recession, interest rates have remained very low, meaning that central banks have had to devise new ways to invigorate the economy in times of recession. In some cases, like quantitative easing, whereby central banks purchase long-term securities in the open market to increase the money supply and encourage lending and investment, these new tools are deemed unconventional.
Topics:
Monetary Policy
Insights / Commentary•Aug 06, 2020
Why banks’ declining reserves matter for the dollar
Financial Times; Wenxin Du
Topics:
Monetary Policy

Insights / Podcast episode•Jun 11, 2020
Episode 9: Could the Fed’s Rescue Go Awry?
Eduardo Porter, Tess Vigeland, Raghuram Rajan
Central banks are playing a critical, yet little discussed, role in limiting the economic damage...
Topics:
COVID-19, Monetary Policy
Insights / Research Brief•Apr 03, 2020
Forward Guidance and Household Expectations • Gender Roles and the Gender Expectations Gap
Policymakers make economic policies based, in part, on their assumptions about how households and businesses will react to a given change in policy. This is especially true of monetary policy, where central banks work to set interest rates that both encourage or discourage economic activity, while keeping inflation at bay.
Topics:
Monetary Policy
Insights / Research Brief•Oct 15, 2019
Policy Uncertainty in Japan
In the aftermath of the Financial Crisis (2007-08) and the Great Recession (2007-09), households and firms faced lots of uncertainty, not only about when and how the economy would recover, but also confusion on whether and how the administration, Congress, and the Federal Reserve would react. For families considering the purchase of a new car or a move to another city for a job, and for businesses considering new hires or a plant expansion, this policy uncertainty meant that the prudent choice was often wait-and-see.
Topics:
Financial Markets, Monetary Policy
Insights / Research Brief•Feb 06, 2019
IQ, Expectations, and Choice and Human Frictions in the Transmission of Economic Policy
In the months and years following the Financial Crisis and Great Recession of 2007-09, the Federal Reserve and the European Central Bank engaged in a number of unconventional policy measures meant to forestall a further drop in economic activity and, ultimately, to ignite economic growth. One of those measures, forward guidance, was intended to stimulate current consumption by informing the public that interest rates would be kept inordinately low for an extended period and hence increasing their inflation expectations.
Topics:
Monetary Policy, Financial Markets, K-12 Education, Higher Education & Workforce Training