Pure Theory of the Federal Funds Rate
Autor: Stefan Homburg
Nummer: 578, Aug 2016, pp. 11
JEL-Class: E43, E51, E58, G01
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.
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