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Day-to-day monetary policy and the volatility of the federal funds interest rate

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  • Leonardo Bartolini
  • Giuseppe Bertola
  • Alessandro Prati

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.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fednsr:110
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    Keywords

    Federal funds rate; Monetary policy - United States;

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