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Federal‐funds‐rate volatility and the reserve‐maintenance period
Author(s) -
Eagle David
Publication year - 1995
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/1058-3300(95)90004-7
Subject(s) - federal funds , volatility (finance) , monetary economics , economics , database transaction , interbank lending market , global assets under management , business , finance , monetary policy , institutional investor , corporate governance , computer science , programming language
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.