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Modelling Federal Reserve Discount Policy

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  • Christopher F. Baum

    ()
    (Boston College)

  • Meral Karasulu

    ()
    (Bogazici University)

Abstract

We employ threshold cointegration methodology to model the policy problem solved by the Federal Reserve System in their manipulation of the discount rate under a reserves target operating procedure utilized since October 1979. The infrequent and discrete adjustments that characterize movements in the discount rate instrument vis-a- vis the Federal Funds rate do not lend themselves to a linear cointegration framework. The inherently nonlinear relationship arising from the Fed's self-imposed constraints on discontinuously changing the discount rate is satisfactorily modelled as an instance of threshold cointegration between the discount rate and the Federal Funds rate.

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File URL: http://fmwww.bc.edu/EC-P/wp335.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 335..

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Length: 29 pages
Date of creation: 01 Jan 1996
Date of revision:
Publication status: published, Computational Economics, 11, 53-70, 1998.
Handle: RePEc:boc:bocoec:335

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Keywords: Monetary policy; discount rate; Fed; threshold cointegration;

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References

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  1. Marvin Goodfriend, 1990. "Interest rates and the conduct of monetary policy," Working Paper, Federal Reserve Bank of Richmond 90-06, Federal Reserve Bank of Richmond.
  2. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 979, Cowles Foundation for Research in Economics, Yale University.
  3. Nathan S. Balke & Thomas B. Fomby, 1992. "Threshold cointegration," Research Paper 9209, Federal Reserve Bank of Dallas.
    • Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
  4. Peristiani, Stavros, 1991. "The Model Structure of Discount Window Borrowing," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(1), pages 13-34, February.
  5. Marvin Goodfriend & William Whelpley, 1986. "Federal funds : instrument of Federal Reserve policy," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 3-11.
  6. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 943, Cowles Foundation for Research in Economics, Yale University.
  7. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, Econometric Society, vol. 64(2), pages 413-30, March.
  8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
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Citations

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Cited by:
  1. Kleimeier,Stefanie & Sander,Harald, 2002. "European Financial Market Integration: Evidence on the Emergence of a Single Eurozone Retail Banking Market," Research Memorandum 060, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  2. Sander,Harald & Kleimeier,Stefanie, 2003. "Convergence in Eurozone retail banking? What interest rate pass-through tells us about monetary policy transmission, competition and integration," Research Memorandum 051, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  3. Lin, Xiaoqiang & Tang, Zhenpeng & Fei, Fangyu, 2013. "Testing for relationships between Shanghai and Shenzhen stock markets: A threshold cointegration perspective," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4064-4074.
  4. Melike Bildirici & Elçin Aykaç Alp, 2012. "Minimum wage is efficient wage in Turkish labor market: TAR–cointegration analysis," Quality & Quantity: International Journal of Methodology, Springer, Springer, vol. 46(4), pages 1261-1270, June.
  5. Christopher F. Baum & Meral Karasulu, 1997. "Credible Disinflation Policy in a Dynamic Setting," Boston College Working Papers in Economics, Boston College Department of Economics 375, Boston College Department of Economics.
  6. Kleimeier,Stefanie & Sander,Harald, 2004. "Expected versus Unexpected Monetary Policy Impulses and Interest Rate Pass-Through in Eurozone Retail Banking," Research Memorandum 001, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  7. Kleimeier, Stefanie & Sander, Harald, 2006. "Expected versus unexpected monetary policy impulses and interest rate pass-through in euro-zone retail banking markets," Journal of Banking & Finance, Elsevier, vol. 30(7), pages 1839-1870, July.
  8. Mendonca, Gui Pedro, 2008. "Structural Breaks, Regime Change and Asymmetric Adjustment: A Short and Long Run Global Approach to the Output/Unemployment Dynamics," MPRA Paper 14648, University Library of Munich, Germany.
  9. Hansen, Bruce E. & Seo, Byeongseon, 2002. "Testing for two-regime threshold cointegration in vector error-correction models," Journal of Econometrics, Elsevier, Elsevier, vol. 110(2), pages 293-318, October.
  10. Nektarios Aslanidis & George Kouretas, 2003. "Testing for two-regime threshold cointegration in the parallel and official markets for foreign currency in Greece," Working Papers, University of Crete, Department of Economics 0311, University of Crete, Department of Economics.
  11. Christopher F. Baum & Meral Karasulu, 1997. "Monetary Policy in the Transition to a Zero Federal Deficit," Boston College Working Papers in Economics, Boston College Department of Economics 363, Boston College Department of Economics.
  12. Francq, Christian & ZakoI¨an, Jean-Michel, 2008. "Deriving the autocovariances of powers of Markov-switching GARCH models, with applications to statistical inference," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 52(6), pages 3027-3046, February.
  13. McKenzie, Andrew M. & Pede, Valerien O., 2005. "Integration In Benin Maize Market: An Application Of Threshold Cointegration Analysis," 2005 Annual meeting, July 24-27, Providence, RI, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 19293, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  14. Kuan-Min Wang, 2010. "Expected and Unexpected Impulses of Monetary Policy on the Interest Pass-Through Mechanism in Asian Countries," Annals of Economics and Finance, Society for AEF, vol. 11(1), pages 95-137, May.

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