Supersedes Working Paper 15-35R - Excess Reserves and Monetary Policy Normalization.

The current environment, in which depository institutions are flush with excess reserves, has forced policymakers to design a new operational framework for monetary policy implementation. The authors provide a parsimonious model that captures the key features of the current federal funds market along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate. They use this model to analyze the factors that determine rates and volumes under the new implementation framework and to study the effects of changes in the policy rates and other shocks to the economic environment. The authors also calibrate the model and use it as a quantitative benchmark for applied analysis, with a particular emphasis on understanding the role of the overnight reverse repurchase agreement facility in supporting the federal funds rate.