Explaining the appearance of open-mouth operations in the 1990s U.S

In the 1990s it became apparent that changes in the FOMC’s target rate could be implemented through announcements alone – “open mouth operations” – without adjustments to reserve supply or the discount rate. This cannot be explained by standard models of the Fed’s system of policy implementation at the time. It differed from experience in the 1970s, the earlier era of interest-rate targeting, though the structure of implementation appeared essentially similar. I explain the appearance of open-mouth operations as a consequence of longstanding Fed discount-window lending practices, interacting with a decrease after the 1970s in the relative importance of discount borrowing by small banks. Data on discount borrowing by large versus small banks in the 1980s–1990s and the 1970s support my explanation. Thanks to James Clouse, Selva Demiralp, Cheryl Edwards, William English, Marvin Goodfriend, Kenneth Kuttner and William Whitesell.