Pure Theory of the Federal Funds Rate

Stefan Homburg

Hannover Economic Papers (HEP) from Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät

Abstract: The effective federal funds rate is determined in a competitive interbank market, while the target federal funds rate represents a policy variable. This paper proposes a theory of the determination of the effective funds rate. According to the main result, the latter is a Lagrange multiplier that vanishes if excess reserves emerge. This is exactly what happened in the United States in September 2008. A final section considers interest on reserves.

Keywords: Federal funds rate; term structure of interest rates; excess reserves; money multiplier; zero lower bound. (search for similar items in EconPapers)
JEL-codes: E43 E51 E58 G01 (search for similar items in EconPapers)
Pages: 11 pages
Date: 2016-08, Revised 2017-02
New Economics Papers: this item is included in nep-mac and nep-mon
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Journal Article: Pure Theory of the Federal Funds Rate (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:han:dpaper:dp-578

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