Banks’ reserve management, transaction costs, and the timing of Federal Reserve intervention

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in www.econstor.euWe thank seminar participants at various institutions for helpful comments; S. Hilton, S. 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. In this context, the central bank's interest-rate-smoothing policy causes a high supply of liquid funds to be associated with high interest rates around reserve settlement days.JEL G21, E52.

Liquidity Shocks in the Eurosystem Interbank Market

“…The setup of the model can already be considered standard and has been extensively described, for example, in Poole (1968), followed by Hamilton (1996) and, more recently, Pérez-Quirós and Rodríguez-Mendizábal (2006), Välimäki (2003) and Bartolini et al (2001), as well as my own papers.…”

“…The theoretical contributions include models of Pérez-Quirós and Rodríguez-Mendizábal (2006), Välimäki (2003), Clouse and Dow Jr. (2002) and Bartolini et al (2001) that focus on explaining the increase in the average level of the interest rate and interest rate volatility at the end of the maintenance period without using trade barriers. The models are constructed in a very similar way and all include so-called liquidity shock as defined initially by Poole (1968).…”

Monetary Policy Implementation and Liquidity Management of the Czech Banking System

“…The increase in the spread volatility results in a decrease in the series autocorrelation of the spread while the process generating the spread is process AR (1). Besides the purely technical causes connected with an increase in the average volume of repo tenders the reasons for an increase in the spread volatility lie in CNB's limited capacities of management of the domestic banking system liquidity on a daily basis because CNB is losing an opportunity to react to the realized difference between OMO target and the supply of excess liquidity on days when no repo tenders are organized.…”

Monetary Policy Implementation: A European Perspective

“…Transaction costs are introduced by e.g. Kopecky and Tucker (1993), Hamilton (1996), Clouse and Dow (1999) and Bartolini, Bertola and Prati (2001). Limits to interbank trading have been mentioned by Spindt and Hoffmeister (1988) and Hamilton (1996).…”