Pure Theory of the Federal Funds Rate
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Stefan Homburg
Abstract
The effective federal funds rate is determined in a competitive interbank market, while the target federal funds rate represents a policy variable. This paper proposes a theory of the determination of the effective funds rate. According to the main result, the latter is a Lagrange multiplier that vanishes if excess reserves emerge. This is exactly what happened in the United States in September 2008. A final section considers interest on reserves.
Acknowledgments
I thank participants of the 11th ifo Dresden Workshop on macroeconomics, particularly Tobias Kranz, for helpful comments. Thanks are also due to Stephan Kohns and Felix Geiger, Deutsche Bundesbank, who commented on an earlier draft.
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© 2016 Oldenbourg Wissenschaftsverlag GmbH, Published by De Gruyter Oldenbourg, Berlin/Boston
Articles in the same Issue
- Frontmatter
- Is Globalization Reducing the Ability of Central Banks to Control Inflation? A Literature Review with an Application to the Euro Area
- The Laffer Curve, Efficiency, and Tax Policy: A Note
- Public Goods, Private Consumption, and Human Capital: Using Boosted Regression Trees to Model Volunteer Labour Supply
- Pure Theory of the Federal Funds Rate
Articles in the same Issue
- Frontmatter
- Is Globalization Reducing the Ability of Central Banks to Control Inflation? A Literature Review with an Application to the Euro Area
- The Laffer Curve, Efficiency, and Tax Policy: A Note
- Public Goods, Private Consumption, and Human Capital: Using Boosted Regression Trees to Model Volunteer Labour Supply
- Pure Theory of the Federal Funds Rate
