Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, Hannover
While the target federal funds rate represents a policy instrument, the effective federal funds rate is determined in a competitive interbank market. The paper proposes a theory of its determination. This yields a specific term structure of interest rates, an account of why the money multiplier approach failed, and a demonstration that interest on reserves does not change bank incentives.
federal funds rate term structure of interest rates excess reserves money multiplier zero lower bound