a. Given the change you observed in the excess reserve balance since the 2007-2008 financial crisis, and the fact that the Fed announced a near-zero federal funds rate target (0-0.25%) in late 2008, do you think open market operations are still effective in implementing the target federal funds rate? In your estimate, which portion of the demand curve for reserves in the model for the market for reserves that we learned in Chapter 18 did the economy fall into since 2008? Explain.
b. Because of the extraordinary measures the Fed undertook during the 2007-2008 financial crisis which were resumed and expanded during the pandemic, the primary tools the Fed relied on to achieve its interest rate target has changed. Given your answer to part e of this question above, which should be the primary tool now? Explain.
c. As we learned in Chapter 18, normally federal funds rate does not fall below the interest rate on excess reserves (IOER). What is the reason for this? Briefly explain.
Now, with the understanding that some financial institutions (such as some insurance companies and the so-called GSEs – government-sponsored enterprises. The latter includes financial agencies such as the household names Fannie Mae and Freddie Mac) which may also supply capital to the market for reserves do not enjoy the benefit of earning interest on excess reserves, do you think the federal funds rate can be lower than the interest rate on excess reserves?
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