Working Paper

Trade Dynamics in the Market for Federal Funds


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.

Keywords: Over-the-counter market; Search; Bargaining; Fed funds market;

JEL Classification: C78; D83; E44; G10;

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Bibliographic Information

Provider: Federal Reserve Bank of Minneapolis

Part of Series: Working Papers

Publication Date: 2014-03-27

Number: 710

Pages: 75 pages