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The discount rate: the other tool of monetary policy

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  • Stephen K. McNees

Abstract

Although open market operations are clearly the primary monetary policy tool, the discount rate is not without influence. Federal Reserve Banks propose any discount rate changes, and the Board of Governors decides whether to accept, reject, or take no action on their requests. This article examines the involvement and influence of the various Reserve Banks in this process, exploring their participation over a 20-year period. The historical analysis shows that Reserve Banks differ in the frequency, persistence, and direction of their proposals for change. ; The article also develops statistical models for the decision procedures of the Reserve Banks in proposing a change and for the Boards rulings on those proposals. Both pay particular attention to labor markets, financial markets, and inflation or monetary aggregates. Results also show that the number of Reserve Bank proposals before the Board does play an independent role in the Boards decisions, above and beyond national economic conditions.

Suggested Citation

  • Stephen K. McNees, 1993. "The discount rate: the other tool of monetary policy," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 3-22.
    • Handle: RePEc:fip:fedbne:y:1993:i:jul:p:3-22
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    File URL: http://www.bostonfed.org/economic/neer/neer1993/neer493a.pdf
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    Citations

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    Cited by:

    1. Geoffrey M. B. Tootell, 2000. "Reserve Banks, the Discount Rate Recommendation, and FOMC Policy," Southern Economic Journal, John Wiley & Sons, vol. 66(4), pages 957-975, April.
    2. Gasbarro, Dominic & Monroe, Gary S., 2004. "The impact of monetary policy candidness on Australian financial markets," Journal of Multinational Financial Management, Elsevier, vol. 14(1), pages 35-46, February.
    3. Shen, Chung-Hua & Hakes, david R., 1995. "Monetary policy as a decision-making hierarchy: The case of Taiwan," Journal of Macroeconomics, Elsevier, vol. 17(2), pages 357-368.

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    Keywords

    Discount; Monetary policy - United States;

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