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Federal Reserve Bank of New York
Staff Reports
Day-to-day monetary policy and the volatility of the federal funds interest rate
Leonardo Bartolini
Giuseppe Bertola
Alessandro Prati
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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Leonardo Bartolini & Giuseppe Bertola & Alessandro Prati, Day-to-day monetary policy and the volatility of the federal funds interest rate, Federal Reserve Bank of New York, Staff Reports 110, 2000.
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Keywords: Federal funds rate ; Monetary policy - United States
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