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A model of the federal funds market

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  • Christian Gilles

    (Board of Governors, Federal Reserve System, Washington, DC 20551, USA)

  • Pamela A. Labadie

    (Board of Governors, Federal Reserve System, Washington, DC 20551, USA)

  • Wilbur John Coleman II.

    (Fuqua School of Business, Duke University, Durham, NC 27708, USA)

Abstract

This paper develops a stochastic general equilibrium model of the federal funds market that incorporates non-Fisherian effects on interest rates stemming from both supply and demand shocks to reserves. Such a model may reconcile the widespread belief in a liquidity effect of money supply shocks with the difficulty many researchers have had in finding empirical support for such an effect. The model also cautions against interpreting the observed negative correlation between the federal funds rate and innovations to nonborrowed reserves as empirical confirmation of the ability of the Federal Reserve to lower short-term real interest rates.

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 7 (1996)
Issue (Month): 2 ()
Pages: 337-357

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Handle: RePEc:spr:joecth:v:7:y:1996:i:2:p:337-357

Note: Received: July 1, 1994; revised version January 30, 1995
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Cited by:
  1. Lawrence J. Christiano, 1996. "Identification and the liquidity effect: a case study," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-13.
  2. Daniel L. Thornton, 1998. "The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect," Working Papers 1998-009, Federal Reserve Bank of St. Louis.
  3. Ricardo Lagos & Gara Afonso, 2010. "Trade Dynamics in the Market for Federal Funds," 2010 Meeting Papers 424, Society for Economic Dynamics.
  4. Altig, David E & Carlstrom, Charles T & Lansing, Kevin J, 1995. "Computable General Equilibrium Models and Monetary Policy Advice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1472-93, November.
  5. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 137-59, February.
  6. Dutkowsky, Donald H. & McCoskey, Suzanne K., 2001. "Near integration, bank reluctance, and discount window borrowing," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1013-1036, June.
  7. Martin Menner & Hugo Rodriguez Mendizabal, 2005. "On the Identification of Monetary (and Other) Shocks," UFAE and IAE Working Papers 650.05, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. Charles T. Carlstrom & Timothy S. Fuerst, 2001. "Monetary policy and self-fulfilling expectations: the danger of forecasts," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 9-19.
  9. Paolo Angelini, 2008. "Liquidity And Announcement Effects In The Euro Area," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 67(1), pages 1-20, March.
  10. Chan Huh, 1996. "Regime switching in the dynamic relationship between the federal funds rate and innovations in nonborrowed reserves," International Finance Discussion Papers 536, Board of Governors of the Federal Reserve System (U.S.).
  11. James Woods, 2003. ""Money" is the Reserves not the Money," Macroeconomics 0309019, EconWPA, revised 28 Dec 2003.
  12. Richard G. Anderson & Robert H. Rasche, 2000. "The domestic adjusted monetary base," Working Papers 2000-002, Federal Reserve Bank of St. Louis.
  13. Daniel L. Thornton, 1996. "Identifying the liquidity effect: the case of nonborrowed reserves," Working Papers 1996-002, Federal Reserve Bank of St. Louis.

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