Working Paper 711

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

Gara Afonso
Ricardo Lagos

Published April 18, 2014

Abstract
We present a dynamic over-the-counter model of the fed funds market and use it to study the determination of the fed funds rate, the volume of loans traded, and the intraday evolution of the distribution of reserve balances across banks. We also investigate the implications of changes in the market structure, as well as the effects of central bank policy instruments such as open market operations, the discount window lending rate, and the interest rate on bank reserves.


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