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Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention

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Author Info
Leonardo Bartolini (Federal Reserve Bank of New York)
Giuseppe Bertoli (European University Institute)
Alessandro Prati (International Monetary Fund)

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Abstract

We use daily data on bank reserves and overnight interest rates to document a striking pattern in the high-frequency behavior of the U.S. market for federal funds: depository institutions tend to hold more reserves during the last few days of each "reserve maintenance period," when the opportunity cost of holding reserves is typically highest. We then propose and analyze a model of the federal funds market where uncertain liquidity flows and transactions costs induce banks to delay trading and to bid up interest rates at the end of each maintenance period. In this context, the central bank's interest-rate-smoothing policy causes a high supply of liquid funds to be associated with high interest rates around reserve settlement days.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 0123.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:0123

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, 2000. "Day-to-day monetary policy and the volatility of the federal funds interest rate," Staff Reports 110, Federal Reserve Bank of New York. [Downloadable!]
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  2. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-47, May. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. James A. Clouse, 1994. "Recent developments in discount window policy," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 965-977.
  5. Hamilton, James D, 1996. "The Daily Market for Federal Funds," Journal of Political Economy, University of Chicago Press, vol. 104(1), pages 26-56, February. [Downloadable!] (restricted)
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  6. Griffiths, Mark D. & Winters, Drew B., 1995. "Day-of-the-week effects in federal funds rates: Further empirical findings," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1265-1284, October. [Downloadable!] (restricted)
  7. Spindt, Paul A. & Hoffmeister, J. Ronald, 1988. "The Micromechanics of the Federal Funds Market: Implications for Day-of-the-Week Effects in Funds Rate Variability," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 23(04), pages 401-416, December. [Downloadable!]
  8. Rudebusch, Glenn D., 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 245-274, April. [Downloadable!] (restricted)
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  9. John Y. Campbell, 1987. "Money Announcements, the Demand for Bank Reserves and the Behavior of the Federal Funds Rate Within the Statement Week," NBER Working Papers 1806, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January. [Downloadable!] (restricted)
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  11. Stavros Peristiani, 1998. "The Growing Reluctance To Borrow At The Discount Window: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 611-620, November. [Downloadable!] (restricted)
  12. James A. Clouse & Douglas W. Elmendorf, 1997. "Declining required reserves and the volatility of the federal funds rate," Finance and Economics Discussion Series 1997-30, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  1. Offermanns, Christian J. & Nautz, Dieter, 2006. "The dynamic relationship between the Euro overnight rate, the ECB´s policy rate and the term spread," Discussion Paper Series 1: Economic Studies 2006,01, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Christian Ewerhart & Nuno Cassola & Steen Ejerskov & Natacha Valla, . "Optimal Allotment Policy in Central Bank Open Market Operations," IEW - Working Papers iewwp201, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  3. Athanasios Orphanides, 2001. "Expectations, open market operations, and changes in the federal funds rate (commentary)," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 33-58. [Downloadable!]
  4. Ulrich Bindseil, 2002. "Equilibrium bidding in the Eurosystem's open market operations," Working Paper Series 137, European Central Bank. [Downloadable!]
  5. Gabriel Pérez Quirós & Hugo Rodríguez, 2000. "The Daily Market for Funds in Europe: Has Something Changed with the EMU?," Economics Working Papers 474, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  6. Ulrike Neyer & Jürgen Wiemers, 2004. "The Influence of a Heterogeneous Banking Sector on the Interbank Market Rate in the Euro Area," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 395-428, September. [Downloadable!]
  7. Gabriel Pérez Quir? & Hugo Rodr?uez Mendiz?al, 2003. "The Daily Market for Funds in Europe: What Has Changed with the EMU?," UFAE and IAE Working Papers 559.03, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
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  8. Kempa, Michal, 2007. "What determines commercial banks’ demand for reserves in the interbank market," Research Discussion Papers 30/2007, Bank of Finland. [Downloadable!]
  9. Anne Vila Wetherilt, 2003. "Money market operations and short-term interest rate volatility in the United Kingdom," Applied Financial Economics, Taylor and Francis Journals, vol. 13(10), pages 701-719, October. [Downloadable!] (restricted)
  10. Ruth Judson & Elizabeth Klee, 2009. "A study of U.S. monetary policy implementation: demand for reserves on a period average basis," Finance and Economics Discussion Series 2009-22, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Emilio Barucci & Claudio Impenna & Roberto Reno, 2003. "The Italian overnight market: microstructure effects, the martingale hypothesis and the payment system," Temi di discussione (Economic working papers) 475, Bank of Italy, Economic Research Department. [Downloadable!]
  12. Ulrich Bindseil & Franz Seitz, 2001. "The supply and demand for Eurosystem deposits - the first 18 months," Working Paper Series 44, European Central Bank. [Downloadable!]
  13. Vitor Gaspar & Gabriel Pérez Quir? & Hugo Rodr?uez Mendiz?al, 2004. "Interest Rate Determination in the Interbank Market," UFAE and IAE Working Papers 603.04, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  14. Kempa , Michal, 2006. "Money market volatility, A simulation study," Research Discussion Papers 13/2006, Bank of Finland. [Downloadable!]
  15. Paolo Angelini, 2002. "Liquidity and Announcement Effects in the Euro Area," Temi di discussione (Economic working papers) 451, Bank of Italy, Economic Research Department. [Downloadable!]
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  16. Giuseppe Bruno & Ernesto Maurizio Ordine & Antonio Scalia, 2005. "BanksÂ’ participation in the Eurosystem auctions and money market integration," Temi di discussione (Economic working papers) 562, Bank of Italy, Economic Research Department. [Downloadable!]
  17. Eduardo Jallath-Coria & Tridas Mukhopadhyay & Amir Yaron, 2002. "How Well Do Banks Manage Their Reserves?," NBER Working Papers 9388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Ken B. Cyree & Mark D. Griffiths & Drew B. Winters, 2003. "On the pervasive effects of Federal Reserve settlement regulations," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 27-46. [Downloadable!]
  19. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2002. "The Overnight Interbank Market: Evidence from the G7 and the Euro Zone," CEPR Discussion Papers 3090, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
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