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Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate

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  • Bartolini, Leonardo
  • Bertola, Giuseppe
  • Prati, Alessandro

Abstract

We propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements, and study the interaction of profit-maximizing banks with a central bank targeting interest rates at high-frequency. The model yields predictions on biweekly patterns of the federal funds rate's volatility and on its response to changes in target rates and in intervention procedures, such as those implemented by the Fed in 1994. Theoretical results are consistent with empirical patterns of interest rate volatility in the U.S. market for federal funds.

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Bibliographic Info

Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 34 (2002)
Issue (Month): 1 (February)
Pages: 137-59

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Handle: RePEc:mcb:jmoncb:v:34:y:2002:i:1:p:137-59

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  8. Angelini, I. & Prati, A., 1993. "Liquidity Effects and the Determinants of Short-Term Interest Rates in Italy," Papers 199, Banca Italia - Servizio di Studi.
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  18. Bernanke, Ben S. & Mihov, Ilian, 1998. "The liquidity effect and long-run neutrality," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 149-194, December.
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  22. Kopecky, Kenneth J. & Tucker, Alan L., 1993. "Interest rate smoothness and the nonsettling-day behavior of banks," Journal of Economics and Business, Elsevier, vol. 45(3-4), pages 297-314.
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