Three Essays on the Federal Funds Market



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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.