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

Author/Editor:

Giuseppe Bertola ; Leonardo Bartolini ; Alessandro Prati

Publication Date:

October 1, 2000

Electronic Access:

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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.

Series:

Working Paper No. 00/163

Subject:

English

Publication Date:

October 1, 2000

ISBN/ISSN:

9781451857924/1018-5941

Stock No:

WPIEA1632000

Format:

Paper

Pages:

34

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