The Over‐the‐Counter Theory of the Fed Funds Market: A Primer

Afonso, Gara; Lagos, Ricardo

doi:10.1111/jmcb.12216

Cited by 17 publications

(1 citation statement)

References 33 publications

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“…Therefore, we decided to develop and implement such a formal representation of the interbank interest rate based on the provided logic of the BoE. Hence, we model the interbank market as a (decentralized) over-the-counter (OTC) market which requires bank b (in need of reserves) to find a counterparty within the set of all other banks willing to lend reserves to b [Afonso and Lagos (2015)]. The conditions for overnight interbank repos are then based on bilateral negotiation about volume and interest charged.…”

Section: Monetary Frameworkmentioning

confidence: 99%

The interaction between monetary and macroprudential policy: should central banks ‘lean against the wind’ to foster macro-financial stability?

Krug

2018

Economics

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The extensive harm caused by the financial crisis raises the question of whether policymakers could have done more to prevent the build-up of financial imbalances. This paper aims to contribute to the field of regulatory impact assessment by taking up the revived debate on whether central banks should use the interest rate to directly respond to the build-up of financial sector imbalances, i.e. 'lean against the wind' or not. Currently, there is no consensus on whether monetary policy is, in general, able to support the resilience of the financial system or if this task should better be left to the macroprudential approach of financial regulation. The author aims to shed light on this issue by analyzing distinct policy regimes within an agent-based computational macro-model with endogenous money. He finds that policies that make use of their comparative advantage lead to superior outcomes concerning their respective intended objectives. In particular, he shows that 'leaning against the wind' should only serve as first line of defense in the absence of a prudential regulatory regime and that price stability does not necessarily mean financial stability. Moreover, macroprudential regulation as unburdened policy instrument is able to dampen the build-up of financial imbalances by restricting credit to the unsustainable high-leveraged part of the real economy.(Published in Special Issue Agent-based modelling and complexity economics) JEL E44 E50 G01 G28 C63

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Section: Monetary Frameworkmentioning

confidence: 99%

The interaction between monetary and macroprudential policy: should central banks ‘lean against the wind’ to foster macro-financial stability?

Krug

2018

Economics

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An experimental examination of interbank markets

2018

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Reserve balances, the federal funds market and arbitrage in the new regulatory framework

Banegas

Tase

2020

Journal of Banking & Finance

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We study developments in reserve balances and the federal funds market in the context of two banking regulatory changes: the widening of the Federal Deposit Insurance Corporation (FDIC) assessment base and the introduction of the Basel III leverage ratio. Using a novel data set that includes FDIC fees and balance sheet data for depository institutions, we find that, as most foreign banks were not subject to the FDIC fee, they absorbed increasing amounts of reserve balances. Furthermore, foreign banks experienced positive and improving conditions for arbitraging between borrowing reserve balances in the federal funds market and earning interest on excess reserves by holding those reserves at the Federal Reserve Banks, contributing to an increase in federal funds borrowing by foreign banks relative to domestic banks. However, the implementation of the Basel III leverage ratio was associated with temporary declines in foreign bank federal funds borrowing at reporting dates.

show abstract

The Over‐the‐Counter Theory of the Fed Funds Market: A Primer

Cited by 17 publications

References 33 publications

The interaction between monetary and macroprudential policy: should central banks ‘lean against the wind’ to foster macro-financial stability?

The interaction between monetary and macroprudential policy: should central banks ‘lean against the wind’ to foster macro-financial stability?

An experimental examination of interbank markets

Reserve balances, the federal funds market and arbitrage in the new regulatory framework

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