A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow

44 Pages Posted: 28 Feb 2018

See all articles by Gara Afonso

Gara Afonso

Federal Reserve Bank of New York

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2018

Abstract

The landscape of the federal funds market changed drastically in the wake of the Great Recession as large-scale asset purchase programs left depository institutions awash with reserves and new regulations made it more costly for these institutions to lend. As traditional levers for implementing monetary policy became less effective, the Federal Reserve introduced new tools to implement the target range for the federal funds rate, changing this landscape even more. In this paper, we develop a model that is capable of reproducing the main features of the federal funds market, as observed before and after 2008, in a single, unified framework. We use this model to quantitatively evaluate the evolution of interest rates and trading volume in the federal funds market as the supply of aggregate reserves shrinks. We find that these outcomes are highly sensitive to the dynamics of the distribution of reserves across banks.

Keywords: monetary policy implementation, federal funds market, over-the-counter markets

JEL Classification: E42, E43, E44, E52, E58

Suggested Citation

Afonso, Gara and Armenter, Roc and Lester, Benjamin R., A Model of the Federal Funds Market: Yesterday, Today, and Tomorrow (February 1, 2018). FRB of New York Staff Report No. 840. Available at SSRN: https://ssrn.com/abstract=3131158 or http://dx.doi.org/10.2139/ssrn.3131158

Gara Afonso (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://nyfedeconomists.org/afonso

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Benjamin R. Lester

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

HOME PAGE: http://sites.google.com/site/benjaminrlester

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