Interbank payments and the daily federal funds rate
AbstractThis paper develops a model of bank reserve management and federal funds rate determination that incorporates the role of interbank payments. In the model, uncertainty in the receipt of payments generates a precautionary demand for bank reserves as banks face both reserve requirements and penalties for overnight overdrafts. Days with higher payment volume are assumed to create more uncertainty in a bank's reserve account that accentuates this precautionary motive. As a result, upward pressure is placed on the equilibrium funds rate. Implications of the model are then estimated using a panel of large banking institutions. Using the parameter estimates, simulations of the model suggest that patterns in payment activity explain many intra-maintenance period movements in both the level and volatility of the federal funds rate.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1998-31.
Date of creation: 1998
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-1998-10-15 (All new papers)
- NEP-FMK-1998-10-15 (Financial Markets)
- NEP-IFN-1998-10-15 (International Finance)
- NEP-MON-1998-10-15 (Monetary Economics)
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