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A Model of the Federal Funds Market

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  • Coleman, Wilbur John, II
  • Gilles, Christian
  • Labadie, Pamela A

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 (February)
Pages: 337-57

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Handle: RePEc:spr:joecth:v:7:y:1996:i:2:p:337-57

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Cited by:
  1. Gara Afonso & Ricardo Lagos, 2012. "Trade dynamics in the market for federal funds," Staff Reports 549, Federal Reserve Bank of New York.
  2. Martin Menner & Hugo Rodríguez Mendizábal, 2008. "On the Identification of Monetary (and Other) Shocks," Finnish Economic Papers, Finnish Economic Association, vol. 21(1), pages 39-56, Spring.
  3. 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.
  4. Alessandro Prati & Giuseppe Bertola & Leonardo Bartolini, 2000. "Day-To-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," IMF Working Papers 00/206, International Monetary Fund.
  5. 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.).
  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. 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.
  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. Lawrence J. Christiano, 1996. "Identification and the liquidity effect: a case study," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-13.
  10. 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.
  11. Daniel L. Thornton, 1996. "Identifying the liquidity effect: the case of nonborrowed reserves," Working Papers 1996-002, Federal Reserve Bank of St. Louis.
  12. Richard G. Anderson & Robert H. Rasche, 2000. "The domestic adjusted monetary base," Working Papers 2000-002, Federal Reserve Bank of St. Louis.
  13. James Woods, 2003. ""Money" is the Reserves not the Money," Macroeconomics 0309019, EconWPA, revised 28 Dec 2003.

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