"Arbitrage, Liquidity, and Exit: The Repo and Federal Funds Markets before, during, and Emerging from the Financial Crisis" Board of Governors of the Federal Reserve System FINANCE AND ECONOMICS DISCUSSION SERIES, no.
Our findings strongly suggest that, going forward, a better understanding of the federal funds market at a disaggregate level depends upon finding data, or improving (and validating) the Furfine algorithm, rather than using the current algorithm's output.
Because the federal funds market has been one of the key financial markets in the United States, it has attracted considerable attention from researchers, especially after the 2008-09 financial crisis.
"Stressed, not Frozen: The Federal Funds Market in the Financial Crisis" JOURNAL OF FINANCE 66, no.
"On the Market Discipline of Informationally Opaque Firms: Evidence from Bank Borrowers in the Federal Funds Market" Federal Reserve Bank of New York STAFF REPORTS, no.
"Systemic Illiquidity in the Federal Funds Market" American Economic Review: PAPERS AND PROCEEDINGS 97, no.
Yet another explanation for this finding is that open market operations account for a very small proportion of the variation in the equilibrium quantities in the reserves and federal funds markets. This explanation is supported by the fact that open market operations explain relatively little of the maintenance-period variation in total reserves and an extremely small amount of the daily variation in daily volume of federal funds transactions.
Consistent with the absence of a liquidity effect, open market operations appear to be a relatively unimportant source of liquidity to the federal funds market. (JEL E43, E52)
In so doing, it provides some evidence on the relative importance of Fed operations in supplying liquidity to the federal funds market.
Hence, some additional evidence on the potential for a liquidity effect can be obtained by investigating the relative importance of open market operations in the federal funds market.
For the federal funds market, this means banks, Fannie Mae, Freddie Mac, and Federal Home Loan Banks.
Despite the possibility that the brokered transactions appear to represent a relatively small share of the federal funds market, these are the correct data for analyzing the relative importance of open market operations because these data are used to calculate the effective federal funds rate--the rate used in virtually all analyses of monetary policy.