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The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations
- Journal of Money, Credit, and Banking
- The Ohio State University Press
- Volume 38, Number 4, June 2006
- pp. 901-920
- 10.1353/mcb.2006.0051
- Article
- Additional Information
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.