Dynamic Programming Models of Short Term Bank Reserve Management.
Abstract
A member bank of the Federal Reserve System is required by law to hold a certain percentage of its deposits in the form of reserves. The reserve requirement must be satisfied on average over a reserve period. Several dynamic programming models of this short term reserve management problem are developed. The objective is to minimize the discounted expected cost of operation over the reserve period. The bank is restricted to one reserve adjustment mechanism, buying or selling funds on the federal funds market. One decision is made for each day within the five day reserve period. The optimal policy for each model is shown to be of a simple form. The first model assumes complete certainty. The second model assumes that future federal funds rates are known, but future changes to the bank's reserves are random. The third model assumes that both future changes to reserves and future changes to the federal funds rate are random. (Author)
Document Details
- Document Type
- Technical Report
- Publication Date
- Jun 01, 1971
- Accession Number
- AD0727724
Entities
People
- Richmond M. Lloyd Jr
Organizations
- University of Rochester