The Dynamics of Ample Reserves

If liquid deposits increase the demand for reserves (Lopez-Salido and Vissing-Jorgensen 2025), then the “ample” level of reserves needed to close the spread between the policy rate and interest on reserves is itself a function of liquid deposits. The supply of reserves will continue to normalize after first reaching ample levels and until liquid deposits return to trend as well. Furthermore, if the supply of reserves encourages deposit creation (Acharya et al. 2024), then a feedback loop arises that can amplify the persistence of elevated deposits and even lead to explosive dynamics. An off-the-shelf calibration exercise finds that even modest amounts of intrinsic deposit persistence could trigger explosive dynamics. Attenuating the response of ample reserves to deposits removes the risk of instability at a modest cost in terms of rate deviations. Simulations with stable roots show that reserves first reach ample earlier and at a higher level than expected by the demand of reserves alone. However, the supply of reserves may decrease further thereafter, at least relative to trend, as liquid deposits remain elevated in the transition period.