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The liquidity effect in the federal funds market: Evidence from daily open market operations

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Carpenter, Seth

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Abstract

We use forecast errors made by the Federal Reserve while preparing open market operations to identify a liquidity effect at a daily frequency in the federal funds market. We find a liquidity effect on most days of the reserve maintenance period in addition to settlement day. The effect is nonlinear; large changes in supply more consistently have a measurable effect than do small changes. In addition, a higher aggregate level of reserve balances in the banking system is associated with a smaller liquidity effect during the maintenance period but a larger liquidity effect on the last days of the period.

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Wiley-Blackwell

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Business, Finance, Economics

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Journal of Money Credit and Banking

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10.1353/mcb.2006.0051

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