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

By Giuseppe Bertola, Leonardo Bartolini, Alessandro Prati

October 1, 2000

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Giuseppe Bertola, Leonardo Bartolini, and Alessandro Prati. Banks’ Reserve Management, Transaction Costs, and the Timing of Federal Reserve Intervention, (USA: International Monetary Fund, 2000) accessed September 18, 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 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.

Subject: Asset and liability management, Banking, Central banks, Commercial banks, Financial institutions, Financial markets, Interbank markets, Liquidity, Monetary policy, Reserve positions, Reserve requirements

Keywords: Bank behavior, Commercial banks, Excess reserves, Fed intervention, Fed issue reserve, Fed regulation, Interbank markets, Interest-rate smoothing, Interest-rate-smoothing policy, Interest-targeting policy, Liquidity, Optimization problem, Reserve positions, Reserve requirements, Settlement day, Value of waiting, WP

Publication Details

Pages:

34
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2000/163
Stock No:

WPIEA1632000
ISBN:

9781451857924
ISSN:

1018-5941

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