Open market operations and the federal funds rate

Daniel Thornton ()

No 2005-063, Working Papers from Federal Reserve Bank of St. Louis

Abstract: The Fed's ability to control the federal funds rate stems from its ability to alter the supply of liquidity in the overnight market through open market operations. This paper uses daily data compiled by the author from the records of the Trading Desk of the Federal Reserve Bank of New York over the period March 1, 1984, through December 31, 1996, to analyze the Desk's use of its operating procedure in implementing monetary policy, and the extent to which open market operations affect the federal funds rate-the liquidity effect. I find that operating procedure was used to guide daily open market operations; however, there is little evidence of a liquidity effect at the daily frequency and even less evidence at lower frequencies. Consistent with the absence of a liquidity effect, open market operations appear to be a relatively unimportant source of liquidity to the federal funds market.

Keywords: Federal funds rate; Open market operations (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mon
Date: 2005
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Journal Article: Open market operations and the federal funds rate (2007)
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