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Trade Dynamics in the Market for Federal Funds

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Listed author(s):
  • Gara Afonso
  • Ricardo Lagos

Abstract

We develop a model of the market for federal funds that explicitly accounts for its two distinctive features: banks have to search for a suitable counterparty, and once they meet, both parties negotiate the size of the loan and the repayment. The theory is used to answer a number of positive and normative questions: What are the determinants of the fed funds rate? How does the market reallocate funds? Is the market able to achieve an efficient reallocation of funds? We also use the model for theoretical and quantitative analyses of policy issues facing modern central banks.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 83 (2015)
Issue (Month): (01)
Pages: 263-313

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Handle: RePEc:wly:emetrp:v:83:y:2015:i::p:263-313
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Find related papers by JEL classification:
  • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
  • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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  1. Weill, Pierre-Olivier, 2008. "Liquidity premia in dynamic bargaining markets," Journal of Economic Theory, Elsevier, vol. 140(1), pages 66-96, May.
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