Interbank payments and the daily federal funds rate

Craig H. Furfine

No 1998-31, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This 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.

Keywords: Federal funds market (United States); Bank reserves (search for similar items in EconPapers)
Date: 1998
New Economics Papers: this item is included in nep-fmk, nep-ifn and nep-mon
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:1998-31

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