Low required reserve balances in 1991 led to a sharp increase in the volatility of the federal funds rate, but similarly low balances in 1996 did not. This paper develops and simulates a microeconomic model of the funds market that explains these facts. We show that reductions in reserve...

We model bargaining between non-bank investors and heterogeneous bank borrowers in the federal funds market. The analysis highlights how the federal funds rate will respond to movements in other money market interest rates in an environment with elevated levels of excess reserves. The model...