Modeling the Reserve Demand to Facilitate Central Bank Operations

By Zhuohui Chen, Nikolaos Kourentzes, Romain M Veyrune

September 1, 2023

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Zhuohui Chen, Nikolaos Kourentzes, and Romain M Veyrune. Modeling the Reserve Demand to Facilitate Central Bank Operations, (USA: International Monetary Fund, 2023) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Implementing monetary policy largely consists in controlling short-term interest rates which supposes having a good understanding of banks’ demand for liquidity also called “reserves” at the central bank. This work aims to offer a modeling methodology for estimating the demand for reserves that itself is influenced by various macro and market structure variables. The model can help central banks to identify ”stable points” on the demand for reserves, which correspond to the levels of reserves for which the short-term interest rate volatility is minimal. Both parametric and non-parametric approaches are provided, with a particular focus on capturing the modeling uncertainty and, therefore, facilitating scenario analysis. A method is proposed to test the forecasting performances of different approaches and exogenous regressors combination, finding that simpler parametric expressions provide on balance better performances. Adding variables to both parametric and non-parametric provides better explanations and predictions. The proposed methodology is evaluated using data from the Euro system and the US Federal Reserve System.

Subject: Central bank operations, Central Banks, Deposit rates, Financial regulation and supervision, Financial services, Monetary policy, Short term interest rates, Standing facilities

Keywords: Central bank operations, Deposit rates, Explanatory variable, Global, Market structure variable, Modeling methodology, Modeling uncertainty, Reserve demand, Scenario analysis, Short term interest rates, Short-term interest rate, Sigmoid, Standing facilities

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2023/179
Stock No:

WPIEA2023179
ISBN:

9798400253348
ISSN:

1018-5941

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