In response to the crisis, several new policies were enacted that altered the structure of the federal funds market
in profound ways.
The authors provide a parsimonious model that captures the key features of the current federal funds market
along with the instruments introduced by the Federal Reserve to implement its target for the federal funds rate.
At the cross sectional level, more leveraged banks are more likely to default, larger banks (by asset size) are more leveraged, have lower equity as a share of deposits and rely more heavily on the federal funds market
to finance new loans.
Federal banks are found to generate higher non-interest income and borrow more from federal funds market
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.
As an example of this mechanism, consider the following crude model of the federal funds market
shown in Figure 3.
Some of the methods described include a classroom federal funds market
experiment, using literature to teach the economics of centrally planned economies, and economics in the film The Third Man.
Similarly, larger institutions appear to be relatively more active than the smaller ones on the supply side of the money market (that is, lending in the federal funds market
and entering into reverse repurchase agreements).
For example, under conventional monetary policy, there was a liquid federal funds market
where banks lent and borrowed reserves privately.
The Federal Open Market Committee establishes the target rate for trading in the Federal funds market
Repos also help the Fed to implement its federal funds rate target, because for banks overnight Treasury repos are a relatively close substitute for borrowing in the federal funds market
The effects of these events can be seen in the trends of not only the federal funds market
, but also the repo, commercial paper, Libor, and Eurodollar markets.