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The federal funds network and monetary policy transmission: Evidence from the 2007–2009 financial crisis

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  • Beltran, Daniel O.
  • Bolotnyy, Valentin
  • Klee, Elizabeth

Abstract

Using a network approach, we show how the federal funds market was transformed during the financial crisis through the collapse of the ABCP market in 2007, changes in monetary policy implementation, and an increase in counterparty credit risk. For both aggregate and bank-level network metrics, we find that increases in counterparty and liquidity risk are associated with reduced lending activity within the network. We also provide evidence that network peer effects are strong and influence banks’ holdings of reserve balances and rates paid in the federal funds market. Finally, we document how these changes to the network structure dampened the transmission of monetary policy.

Suggested Citation

  • Beltran, Daniel O. & Bolotnyy, Valentin & Klee, Elizabeth, 2021. "The federal funds network and monetary policy transmission: Evidence from the 2007–2009 financial crisis," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 187-202.
    • Handle: RePEc:eee:moneco:v:117:y:2021:i:c:p:187-202
    DOI: 10.1016/j.jmoneco.2019.12.006
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    Cited by:

    1. Li, Rongrong & Li, Shuyu, 2021. "Carbon emission post-coronavirus: Continual decline or rebound?," Structural Change and Economic Dynamics, Elsevier, vol. 57(C), pages 57-67.
    2. Kevin F. Kiernan & Vladimir Yankov & Filip Zikes, 2021. "Liquidity Provision and Co-insurance in Bank Syndicates," Finance and Economics Discussion Series 2021-060, Board of Governors of the Federal Reserve System (U.S.).
    3. Abou Tanos, Barbara & Jimenez-Garcès, Sonia, 2022. "Foreign investments during financial crises: Institutional investors’ informational skills create value when familiarity does not," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    4. Hummaira Jabeen, 2022. "Monetary Policy Shock Transmission in Emerging Markets," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 8(4), pages 379-390, December.

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    More about this item

    Keywords

    Networks; Fedwire; Federal funds; Interbank lending;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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