Work

The Daily Market for Federal Funds

Year: 1996

Type: article

Abstract: This paper reports overwhelming evidence against the hypothesis that the federal funds rate follows a martingale over the 2-week reserve maintenance period, establishing that banks do not regard reserves held on different days of the week to be perfect substitutes. A theoretical model of the federal funds market is proposed that could account for these empirical regularities as the result of line limits, transaction costs, and weekend accounting conventions. The paper concludes that such transaction costs lie at the heart of the liquidity effect that enables the Federal Reserve to change the interest rate on a daily basis.

Source: Journal of Political Economy

DOI: 10.1086/262016

Author: James D. Hamilton

Institutions: National Bureau of Economic Research, University of California San Diego

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2016673835

FWCI: 26.5

Cites:

Cited by: 427

Related to: 10