Monetary Operating Procedures in the Fed Funds Market: Theory and Policy Analysis

Ricardo Lagos and Gaston Navarro

No 1521, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: The federal funds market changed drastically during the last decade, as new policy tools were implemented while large-scale asset purchases programs increased reserve balances to unprecedented levels. We develop a model of the federal funds market that incorporates most of its salient features and recent changes. The model includes heterogeneous types of banks and we estimate the parameters governing this heterogeneity using bank-level transaction data. Consistent with the data, a small set of very active banks in the model participate in the majority of loan transactions. We use the model to analyze the consequences of a balance sheet normalization. We argue that the increase in interest rates will be larger if reserves decrease disproportionately more for the set of active banks.

Date: 2019
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1521

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