Trade Dynamics in the Market for Federal Funds

Gara Afonso, Ricardo Lagos

    Research output: Contribution to journalArticle

    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.

    Original languageEnglish (US)
    Pages (from-to)263-313
    Number of pages51
    JournalEconometrica
    Volume83
    Issue number1
    DOIs
    StatePublished - Jan 1 2015

    Keywords

    • Bargaining
    • Fed funds market
    • Over-the-counter market
    • Search

    ASJC Scopus subject areas

    • Economics and Econometrics

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