Three Essays on the Federal Funds Market

Brian J. Bonis

Major Professor: Carlos D Ramirez, PhD, Department of Economics

Committee Members: Lawrence H. White, Donald J. Boudreaux, Stephen D. Morris

Online Location, Online
October 08, 2021, 03:00 PM to 05:00 PM

Abstract:

Economist James D. Hamilton once wrote, “The federal funds market is a good place to start for an understanding of either finance or monetary policy.”  In this dissertation, I do a deep dive into the federal funds market and explore how it has evolved since the Great Financial Crisis of 2007-2009 (GFC).  Additionally, I investigate changes to Treasury cash management policies and analyze their impacts on taxpayers and the federal funds market.  Finally, I advance the federal funds literature by updating Hamilton’s federal funds rate model in his 1997 AER paper with contemporary data, and then I create a new federal funds model to better explain the modern-day federal funds market. 

In chapter 1, I explore the various characteristics of the federal funds market by carefully defining what constitutes a federal funds trade, explaining how the federal funds rate is calculated, and describing the market participants.  Then, I review how the federal funds market operated in the decades leading up to the GFC.  I go on to explain how the federal funds market has drastically changed since the GFC and how it operates today.  Finally, I describe the origins of the federal funds market and highlight some market dynamics in its first several decades. 

In chapter 2, I describe the Treasury’s cash management policies both before and after the GFC.  This lays the groundwork for a more in-depth discussion where I examine taxpayer funding costs associated with Treasury cash management policies and potential monetary policy implications related to changes in the size of the Treasury General Account. 

In chapter 3, I advance the federal funds market literature by updating Hamilton’s 1997 federal funds rate model with data from 2018-2019 to show that the liquidity effect he described in his paper no longer exists in the selected time period.  Then, I create a new model to reflect policy and market structure changes that have emerged in recent years.