Intraday Liquidity and Money Market Dislocations

This paper proposes a new model of monetary policy implementation to account for two key developments: (i) the introduction of intraday liquidity requirements and (ii) the decreasing relevance of the federal funds market in favor of repurchase agreement (repo) markets with nonbank participants. Our paper studies how liquidity requirements prevent banks from arbitraging between the fed funds and repo markets and generate large repo spikes. We propose a simple measure of excess intraday reserves. Consistent with our theory, this metric is close to zero in 2019Q2, when U.S. repo markets experienced a spike of 400 basis points. This paper was accepted by Lukas Schmid, finance. Funding: This work was supported by Fama-Miller Center for Research in Finance, Booth School of Business, University of Chicago. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2023.04037 .