Federal‐funds‐rate volatility and the reserve‐maintenance period

David Eagle

Review of Financial Economics, 1995, vol. 4, issue 2, 157-170

Abstract: The day‐to‐day changes in the federal funds rate affects all banks, in particular those banks who execute their single federal funds transaction through larger correspondent banks. This paper's stochastic equilibrium model discusses how a major determinant of that behavior—the bank's reserve‐maintenance period—molds the interday pattern of federal‐funds‐rate volatility. In particular, the model explains why the volatility of the federal funds rate increases from the beginning to the end of that period. While Spindt and Hoffmeister (1988) tried to explain that increases in terms of transaction‐cost avoidance, this paper's model demonstrates that rational expectations alone will generate this effect. It also shows that lengthening the reserve‐maintenance period increases federal‐funds rate volatility on the last day of the period.

Date: 1995
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https://doi.org/10.1016/1058-3300(95)90004-7

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Persistent link: https://EconPapers.repec.org/RePEc:wly:revfec:v:4:y:1995:i:2:p:157-170

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