RRP take-up reduces liquidity held by banks, but does not change the quantity of liquidity held by Non-Banks. This difference arises from our two tiered monetary system, where banks and non-banks hold different types of money. Banks lose reserves (money for banks) when they settle payments to the Fed on behalf of Non-Bank RRP participants. But from the perspective of Non-Banks, the RRP just replaces bank deposits (money for non-banks) with what are essentially secured deposits at the Fed. At the zero lower bound, the RRP is a cash equivalent and RRP take-up is largely a function of bank balance sheet constraints. In this post we walk through the balance sheet mechanics of RRP participation from the perspective of Non-Banks, Banks, and the Fed. The current context suggests the RRP is largely acting as a tool to manage the side effects of QE.

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