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Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate
September 2000Number 110
JEL classification: G21, E52
Authors: Leonardo Bartolini, Giuseppe Bertola, Alessandro Prati
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.
For a published version of this report, see Leonardo Bartolini, Giuseppe Bertola, and Alessandro Prati, "Day-to-Day Monetary Policy and the Volatility of the Federal Funds Interest Rate," Journal of Money, Credit, and Banking 34, no.1 (February 2002): 137-59.