THE EFFECT OF CONTEMPORANEOUS RESERVE ACCOUNTING ON THE MARKET FOR FEDERAL-FUNDS

This paper evaluates the effect of the transition from lagged to contemporaneous reserve accounting for the determination of bank reserve requirements through its impact on the market for Federal funds. The results indicate that increased target reserve uncertainty resulting from the implementation of the contemporaneous reserve accounting system (CRA) caused an initial increase in intraday Federal funds rate variance and daily interest rate differences. However, subsequent to a 'learning' period, intraday variance appears to be less pronounced and daily differentials appear to be narrower than under the previously used lagged reserve accounting system (LRA). These results are attributed to the lengthening of the accounting period from one to two weeks. Therefore, while not costless, the new system does not appear to have seriously disrupted the Federal funds market.