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A Micro Model of the Federal Funds Market
Author(s) -
HO THOMAS S. Y.,
SAUNDERS ANTHONY
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb05026.x
Subject(s) - federal funds , valuation (finance) , business , global assets under management , monetary economics , money market , interbank lending market , excess reserves , monetary policy , economics , financial system , finance , quantitative easing , institutional investor , central bank , corporate governance
This paper demonstrates that valuable insights into the determination of Federal funds rates can be gained through modeling the micro‐decisions of market participants. Fed fund demand functions are derived for different bank valuation functions and several implications are discussed. Specifically, it is: (i) possible to rationalize the observation that large banks are net purchasers and small banks net sellers of Fed funds; (ii) to explain the positive spread of Fed funds rates over other short‐term money market rates; and (iii) to link the size of this spread to the Federal Reserve's underlying monetary policy strategy.