Fed paper models impact of return to normal rates
Rate rises may have an impact on financial intermediation
A discussion paper published last week by the Federal Reserve seeks to better model the effects of raising the federal funds rate now that the central bank has two tools at its disposal – interest on excess reserves (IOER) and reverse repos (RRPs).
The Federal Reserve's tools for policy normalisation in a preferred habitat model of financial markets, by Han Chen, Jim Clouse, Jane Ihrig and Elizabeth Klee, uses a model in which investors prefer assets that are similar to their current portfolio –
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