Pure Theory of the Federal Funds Rate

Homburg Stefan ()
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Homburg Stefan: School of Economics and Management, Leibniz University Hannover, Germany

Review of Economics, 2016, vol. 67, issue 3, 285-296

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; 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)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1515/roe-2017-0002

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