Staff Reports
The Optimal Supply of Central Bank Reserves under Uncertainty
Number 1077
November 2023 December 2023

JEL classification: E52, E58, E41, E42

Authors: Gara Afonso, Gabriele La Spada, Thomas M. Mertens, and John C. Williams

This paper provides an analytically tractable theoretical framework to study the optimal supply of central bank reserves when the demand for reserves is uncertain and nonlinear. We fully characterize the optimal supply of central bank reserves and associated market equilibrium. We find that the optimal supply of reserves under uncertainty is greater than that absent uncertainty. With a sufficient degree of uncertainty, it is optimal to supply a level of reserves that is abundant (on the flat portion of the demand curve). The model captures the empirical observation that the variability of interest rate spreads depends on reserves supply.

Full Article
Author Disclosure Statement(s)
Gara Afonso
Gara Afonso declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Gabriele La Spada
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.

Thomas M. Mertens
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

John C. Williams
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Suggested Citation:
Afonso, Gara, Gabriele La Spada, Thomas M. Mertens, and John C. Williams. 2023. “The Optimal Supply of Central Bank Reserves under Uncertainty.” Federal Reserve Bank of New York Staff Reports, no. 1077, November. https://doi.org/10.59576/sr.1077

By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.   Close