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Borrowed reserves and deposit variation: The risks to monetary policy

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  • Michael Tindall
  • Roger Spencer

Abstract

A theory of bank reserves is presented with emphasis on the behavior of borrowed reserves, the Federal Reserve's operating instrument. The theory explains the observed nonlinear relationship between borrowing and the spread between the federal funds rate and the discount rate. The theory shows that borrowed reserves are also a function of deposit variation. A shift in bankers' perceptions of deposit variation can cause borrowed reserves demand to shift so that the level of borrowing is not a reliable indicator of the degree of reserve pressure. Since borrowed reserves are used as the Federal Reserve's operating instrument, problems such as these pose substantial risks to the implementation of monetary policy. Copyright International Atlantic Economic Society 1997

Suggested Citation

  • Michael Tindall & Roger Spencer, 1997. "Borrowed reserves and deposit variation: The risks to monetary policy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 25(3), pages 297-306, September.
  • Handle: RePEc:kap:atlecj:v:25:y:1997:i:3:p:297-306
    DOI: 10.1007/BF02298411
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    References listed on IDEAS

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    1. Tinsley, Peter A, et al, 1982. "Policy Robustness: Specification and Simulation of a Monthly Money Market Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 829-856, November.
    2. Peristiani, Stavros, 1991. "The Model Structure of Discount Window Borrowing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(1), pages 13-34, February.
    3. Feinman, Joshua N, 1993. "Estimating the Open Market Desk's Daily Reaction Function," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 231-247, May.
    4. Farr, Helen T & Porter, Richard D, 1982. "Comment on "What Do Money Market Models Tell Us about How to Implement Monetary Policy?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 857-868, November.
    5. Dutkowsky, Donald H. & Foote, William G., 1988. "Forecasting discount window borrowing," International Journal of Forecasting, Elsevier, vol. 4(4), pages 593-603.
    6. Dutkowsky, Donald H, 1984. "The Demand for Borrowed Reserves: A Switching Regression Model," Journal of Finance, American Finance Association, vol. 39(2), pages 407-424, June.
    7. Judd, John P & Scadding, John L, 1982. "Comment on "What Do Money Market Models Tell Us about How to Implement Monetary Policy?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 868-877, November.
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    Cited by:

    1. repec:kap:iaecre:v:6:y:2000:i:2:p:178-191 is not listed on IDEAS
    2. Michael Tindall & Roger Spencer, 2000. "Central bank reserve management: Aggregate targets and interest payments on reserves," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 6(2), pages 178-191, May.
    3. Dutkowsky, Donald H. & McCoskey, Suzanne K., 2001. "Near integration, bank reluctance, and discount window borrowing," Journal of Banking & Finance, Elsevier, vol. 25(6), pages 1013-1036, June.

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