Interbank Payments and the Daily Federal Funds Rate

22 Pages Posted: 9 Oct 1998

Multiple version iconThere are 2 versions of this paper

Date Written: April 24, 1998

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.

JEL Classification: G21, E52

Suggested Citation

Furfine, Craig, Interbank Payments and the Daily Federal Funds Rate (April 24, 1998). Federal Reserve Board FEDS Paper No. 98-31. Available at SSRN: https://ssrn.com/abstract=121283 or http://dx.doi.org/10.2139/ssrn.121283

Craig Furfine (Contact Author)

Kellogg School of Management - Department of Finance ( email )

Evanston, IL 60208
United States

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