Intraday Liquidity and Money Market Dislocations.

This article develops a new model of monetary policy implementation that incorporates two recent key changes: intraday liquidity requirements for banks and the growing dominance of repurchase agreement (repo) markets involving nonbank shadow banks over the traditional federal funds market. The model shows that regulatory intraday liquidity constraints limit banks' ability to intermediate liquidity between fed funds and repo markets, causing sharp spikes in repo rates when demand from shadow banks exceeds the intraday supply of reserves. The authors introduce a quantitative measure of intraday excess reserves, demonstrating that this metric approached zero in mid-2019, coinciding with the notable repo rate spike in September 2019. The findings imply that sustaining stable money markets under current regulations requires the Federal Reserve to maintain a larger balance sheet than previously estimated, with important implications for financial stability given shadow banks' lack of access to central bank emergency liquidity.