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Interbank payments and the daily federal funds rate

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  • Craig H. Furfine

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.

Suggested Citation

  • Craig H. Furfine, 1998. "Interbank payments and the daily federal funds rate," Finance and Economics Discussion Series 1998-31, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:1998-31
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    Cited by:

    1. Nikolay Nenovsky & Petar Chobanov, 2004. "Dynamics of the Inter-Bank Market in Bulgaria," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 3, pages 32-52.
    2. Eduardo Jallath-Coria & Tridas Mukhopadhyay & Amir Yaron, 2002. "How Well Do Banks Manage Their Reserves?," NBER Working Papers 9388, National Bureau of Economic Research, Inc.
    3. James P. Dow, 2001. "The Demand for Excess Reserves," Southern Economic Journal, John Wiley & Sons, vol. 67(3), pages 685-700, January.
    4. Jeffrey M. Wrase, 1998. "Is the Fed being swept out of (monetary) control?," Business Review, Federal Reserve Bank of Philadelphia, issue Nov, pages 3-12.
    5. Joe Ganley, 2004. "Surplus Liquidity: Implications for Central Banks," Lectures, Centre for Central Banking Studies, Bank of England, number 3, April.
    6. Clouse, James A. & Dow, James Jr., 2002. "A computational model of banks' optimal reserve management policy," Journal of Economic Dynamics and Control, Elsevier, vol. 26(11), pages 1787-1814, September.
    7. Fumio Hayashi, 2000. "Is There a Liquidity Effect in the Japanese Market?," Harvard Institute of Economic Research Working Papers 1898, Harvard - Institute of Economic Research.

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    Keywords

    Federal funds market (United States); Bank reserves;

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