Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297380 
Year of Publication: 
2022
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2022-48
Publisher: 
Bank of Canada, Ottawa
Abstract: 
This paper explains the nature of interest rates in the U.S. federal funds market after the 2007-09 financial crisis. We build a model of the over-the-counter lending market that incorporates new aspects of the financial system: abundance of liquidity, different regulatory standards for banks, and arbitrage opportunities created by limited access to the facility granting interest on excess reserves. The model determines the equilibrium federal funds rate as a function of the policy rates and explains the "leaky floor" phenomenon in which we observe federal funds rates that are strictly below the interest rate paid on reserves. Using the model, we explain the impact of raising government yields and tightening the Liquidity Coverage Ratio (LCR) and the Supplementary Leverage Ratio (SLR) requirements on the federal funds rates.
Subjects: 
Central bank research
Economic models
Financial institutions
Financial markets
Financial stability
Wholesale funding
Financial system regulation and policies
JEL: 
E42
E58
G2
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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