Interbank payments and the daily federal funds rate

Predictable patterns in the level and volatility of interbank payments match those found in the daily federal funds rate. This paper develops a structural model of bank reserve management that rationalizes this finding. Implications of the model are then estimated using a panel of large banking institutions. Simulations based upon these empirical estimates suggest that patterns in payment activity can explain much of the observed intra-maintenance period movement in the federal funds rate around its target. Further, volatility in bank payment flows generates funds rate volatility comparable to what is observed.