Banks’ Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention

Giuseppe Bertola, Leonardo Bartolini and Alessandro Prati

No 2000/163, IMF Working Papers from International Monetary Fund

Abstract: We use daily data on bank reserves and overnight interest rates to document a striking pattern in the high-frequency behavior of the U.S. market for federal funds: depository institutions tend to hold more reserves during the last few days of each “reserve maintenance period,” when the opportunity cost of holding reserves is typically highest. We then propose and analyze a model of the federal funds market where uncertain liquidity flows and transaction costs induce banks to delay trading and to bid up interest rates at the end of each maintenance period.

Keywords: WP; settlement day; excess reserves; Reserve requirements; interest-rate smoothing; value of waiting; Fed intervention; interest-targeting policy; Fed regulation; optimization problem; Fed issue reserve; interest-rate-smoothing policy; bank behavior; Liquidity; Commercial banks; Reserve positions; Interbank markets (search for similar items in EconPapers)
Pages: 34
Date: 2000-10-01
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Banks' reserve management, transaction costs, and the timing of Federal Reserve intervention (2001)
Working Paper: Banks' Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention (2000)
Working Paper: Banks' reserve management, transaction costs, and the timing of the Federal Reserve intervention (2000)
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