A Sequential Bargaining Model of the Fed Funds Market with Excess Reserves

James A. Clouse and Sam Schulhofer-Wohl
Additional contact information
James A. Clouse: https://www.federalreserve.gov/econres/james-a-clouse.htm

No WP-2018-8, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We model bargaining between non-bank investors and heterogeneous bank borrowers in the federal funds market. The analysis highlights how the federal funds rate will respond to movements in other money market interest rates in an environment with elevated levels of excess reserves. The model predicts that the administered rate offered through the Federal Reserve's overnight reverse repurchase agreement facility influences the fed funds rate even when the facility is not used. Changes in repo rates pass through to the federal funds rate, but by less than one-for-one. We calibrate the model to data from 2017 and find in an out-of-sample test that the model quantitatively matches the increase in the federal funds rate in the first four months of 2018. The rise in the fed funds rate in 2018 is attributed to movements in repo rates and not to changes in the scarcity value of reserves.

Keywords: Federal funds market; federal funds rates; Federal Reserve; interest rates; money markets (search for similar items in EconPapers)
JEL-codes: E42 E43 E47 E52 E58 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2018-05-01
New Economics Papers: this item is included in nep-cba, nep-gth, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.chicagofed.org/~/media/publications/wo ... 18/wp2018-08-pdf.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:wp-2018-08

Ordering information: This working paper can be ordered from

DOI: 10.21033/wp-2018-08

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of Chicago Contact information at EDIRC.
Bibliographic data for series maintained by Lauren Wiese ().