Monetary Policy Operations: Theory, Evidence, and Tools for Quantitative Analysis

We formulate a quantitative dynamic equilibrium theory of trade in the fed funds market, calibrate it to fit a comprehensive set of market-wide and micro-level cross-sectional observations, and use it to make two contributions to the operational side of monetary policy implementation. First, we produce global structural estimates of the aggregate demand for reserves—a crucial decision-making input for modern central banks. Second, we propose diagnostic tools to gauge the central bank’s ability to track a given fed funds target, and the heterogeneous incidence of policy actions on the shadow cost of funding across banks.