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Monetary Operating Procedures in the Fed Funds Market: Theory and Policy Analysis

Author

Listed:
  • Ricardo Lagos

    (New York University)

  • Gaston Navarro

    (Federal Reserve Board)

Abstract

The federal funds market changed drastically during the last decade, as new policy tools were implemented while large-scale asset purchases programs increased reserve balances to unprecedented levels. We develop a model of the federal funds market that incorporates most of its salient features and recent changes. The model includes heterogeneous types of banks and we estimate the parameters governing this heterogeneity using bank-level transaction data. Consistent with the data, a small set of very active banks in the model participate in the majority of loan transactions. We use the model to analyze the consequences of a balance sheet normalization. We argue that the increase in interest rates will be larger if reserves decrease disproportionately more for the set of active banks.

Suggested Citation

  • Ricardo Lagos & Gaston Navarro, 2019. "Monetary Operating Procedures in the Fed Funds Market: Theory and Policy Analysis," 2019 Meeting Papers 1521, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1521
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    References listed on IDEAS

    as
    1. Ricardo Lagos & Guillaume Rocheteau, 2007. "Search in Asset Markets: Market Structure, Liquidity, and Welfare," American Economic Review, American Economic Association, vol. 97(2), pages 198-202, May.
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    Cited by:

    1. Pierre-Olivier Weill, 2020. "The search theory of OTC markets," NBER Working Papers 27354, National Bureau of Economic Research, Inc.
    2. Jonathan Witmer, 2025. "The Optimum Quantity of Central Bank Reserves," Staff Working Papers 25-15, Bank of Canada.

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