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Operational outages and aggregate uncertainty in the federal funds market

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  • Klee, Elizabeth
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    Abstract

    This paper uses operational problems at depository institutions in sending Fedwire payments as a proxy for aggregate uncertainty in end-of-day Fed account positions and then examines funds market behavior on those days. The results suggest that increased uncertainty is associated with a deviation of the federal funds rate from the Federal Open Market Committee's (FOMC's) target rate; the magnitude depends on the severity of the difficulty, the payment volume of the affected participant, and the time of day. The intraday standard deviation of the federal funds rate is also affected by operational outages. Moreover, extensions to Fedwire are more likely on days with possible outages, and discount window borrowing picks up on these days as well.

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    File URL: http://www.sciencedirect.com/science/article/B6VCY-4YJ4N9Y-2/2/11679108f559a369af9d10e56f081763
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 2386-2402

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:10:p:2386-2402

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Federal funds market Monetary policy implementation Payment systems Discount window;

    References

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    1. Nautz, Dieter & Schmidt, Sandra, 2008. "Monetary Policy Implementation and the Federal Funds Rate," ZEW Discussion Papers 08-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    2. Angelo Ranaldo, 2007. "Segmentation and Time-of-Day Patterns in Foreign Exchange Markets," Working Papers 2007-03, Swiss National Bank.
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    5. Jeffrey M. Lacker, 2003. "Payment system disruptions and the Federal Reserve following September 11, 2001," Working Paper 03-16, Federal Reserve Bank of Richmond.
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    7. Demiralp, Selva & Preslopsky, Brian & Whitesell, William, 2006. "Overnight interbank loan markets," Journal of Economics and Business, Elsevier, vol. 58(1), pages 67-83.
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    11. Selva Demiralp & Erhan Artuç, 2007. "Discount Window Borrowing after 2003: The Explicit Reduction in Implicit Costs," Koç University-TUSIAD Economic Research Forum Working Papers 0708, Koc University-TUSIAD Economic Research Forum.
    12. Carpenter, Seth & Demiralp, Selva, 2006. "The Liquidity Effect in the Federal Funds Market: Evidence from Daily Open Market Operations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 901-920, June.
    13. Spence Hilton, 2005. "Trends in federal funds rate volatility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 11(Jul).
    14. Gaspar, Vítor & Pérez Quirós, Gabriel & Rodríguez Mendizábal, Hugo, 2008. "Interest rate dispersion and volatility in the market for daily funds," European Economic Review, Elsevier, vol. 52(3), pages 413-440, April.
    15. Clouse, James A. & Dow Jr., James P., 1999. "Fixed costs and the behavior of the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1015-1029, July.
    16. Adam B. Ashcraft & Darrell Duffie, 2007. "Systemic Illiquidity in the Federal Funds Market," American Economic Review, American Economic Association, vol. 97(2), pages 221-225, May.
    17. Selva Demiralp & Dennis Farley, 2003. "Declining required reserves, funds rate volatility, and open market operations," Finance and Economics Discussion Series 2003-27, Board of Governors of the Federal Reserve System (U.S.).
    18. John B. Taylor, 2001. "Expectations, open market operations, and changes in the federal funds rate," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58.
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    Cited by:
    1. Foote, Elizabeth, 2014. "Information asymmetries and spillover risk in settlement systems," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 179-190.
    2. Kopchak, Seth J., 2011. "The liquidity effect for open market operations," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3292-3299.

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