Working Paper: NBER ID: w31370
Authors: Ricardo Lagos; Gastón Navarro
Abstract: We formulate a quantitative dynamic equilibrium theory of trade in the fed funds market, calibrate it to fit a comprehensive set of market-wide and micro-level cross-sectional observations, and use it to make two contributions to the operational side of monetary policy implementation. First, we produce global structural estimates of the aggregate demand for reserves—a crucial decision-making input for modern central banks. Second, we propose diagnostic tools to gauge the central bank’s ability to track a given fed funds target, and the heterogeneous incidence of policy actions on the shadow cost of funding across banks.
Keywords: Monetary Policy; Fed Funds Market; Quantitative Analysis
JEL Codes: C78; D83; E44; E49; G1; G18; G2; G21; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Calibration of model (C52) | Global structural estimates of aggregate demand for reserves (E19) |
| Changes in policy instruments (O24) | Market price of fed funds (E52) |
| Supply of reserves (Q31) | Variation in equilibrium fed funds rate (E52) |