An economic model of the market for negotiable certificates of deposit

Myron B. Slovin, Marie Elizabeth Sushka

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

The model developed in this paper explains both the quantity of CDs and the rate of interest on this instrument. We demonstrate that the behavior of the market for this financial asset is characterized by a dichotomy which has been induced by the Federal Reserve's administration of Regulation Q ceilings on offering rates on CDs. During several time spans since 1961, Regulation Q had no impact on the CD market and we hypothesize that the behavior of the CD market reflected market forces of both demand and supply. However during several periods, the Regulation Q ceiling effectively bound offering rates on CDs which induced a runoff in the quantity of CDs while the secondary CD rate was bid up to the level of market interest rates. In modeling the behavior of the CD market, equations are developed for both the outstanding quantity of CDs and the interest rate on CDs, each of which consists of different sets of variables for normal and runoff periods in order to explain this dichotomy.

Original languageEnglish (US)
Pages (from-to)551-568
Number of pages18
JournalJournal of Monetary Economics
Volume5
Issue number4
DOIs
StatePublished - Oct 1979
Externally publishedYes

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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