The impact of the return to lagged reserve requirements on the federal funds market

We examine the impact on the settlement Wednesday effect in daily fed funds rates following the change from contemporaneous reserve requirements (CRR) to lagged reserve requirements (LRR). The Federal Reserve changed from CRR to LRR, in part, to make it easier for banks to settle their reserve accou...

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Bibliographic Details
Published in:Journal of economics and business 2007-03, Vol.59 (2), p.111-129
Main Authors: Kotomin, Vladimir, Winters, Drew B.
Format: Article
Language:English
Subjects:
Clearance & settlement
Federal funds rate
Hypotheses
Impact analysis
Reserve requirements
Settlement Wednesday effects
Studies
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Summary:We examine the impact on the settlement Wednesday effect in daily fed funds rates following the change from contemporaneous reserve requirements (CRR) to lagged reserve requirements (LRR). The Federal Reserve changed from CRR to LRR, in part, to make it easier for banks to settle their reserve accounts. Our hypothesis is that the switch to LRR will reduce the demand for reserves on settlement Wednesdays, thus reducing the settlement Wednesday effect in fed funds rates. Our empirical results provide strong support for our hypothesis.
ISSN:0148-6195
1879-1735
DOI:10.1016/j.jeconbus.2006.02.002