Abstract

We propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements, and study the interaction of profit-maximizing banks with a central bank targeting interest rates at high frequency. The model yields predictions on biweekly patterns of the federal funds rate's volatility and on its response to changes in target rates and in intervention procedures, such as those implemented by the Fed in 1994. Theoretical results are consistent with empirical patterns of interest rate volatility in the U.S. market for federal funds.

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Additional Information

ISSN
1538-4616
Print ISSN
0022-2879
Pages
pp. 137-159
Launched on MUSE
2002-02-01
Open Access
No
Archive Status
Archived 2007
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