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

By Alessandro Prati, Giuseppe Bertola, Leonardo Bartolini

December 1, 2000

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Alessandro Prati, Giuseppe Bertola, and Leonardo Bartolini. Day-To-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate, (USA: International Monetary Fund, 2000) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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 Federal Reserve in 1994. Theoretical results are consistent with empirical patterns of interest rate volatility in the U.S. market for federal funds.

Subject: Asset and liability management, Banking, Central banks, Liquidity, Monetary policy, Reserve positions, Reserve requirements

Keywords: Fed behavior, Fed intervention, Fed operation, Federal funds, Federal funds rate, Interest rate, Interest rate volatility, Intervention procedure, Liquidity, Monetary policy, Open market desk, Percent Fed target change, Reserve positions, Reserve requirements, Target rate, Volatility, WP

Publication Details

Pages:

29
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/206
Stock No:

WPIEA2062000
ISBN:

9781451874594
ISSN:

1018-5941

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