Standing facilities and interbank borrowing: evidence from the Federal Reserve’s new discount window
Standing facilities are designed to place an upper bound on the rates at which financial institutions lend to one another overnight, reducing the volatility of the overnight interest rate, typically the rate targeted by central banks. However, improper design of the facility might decrease a bank’s incentive to participate actively in the interbank market. Thus, the mere availability of central bank provided credit may lead to its use being more than what would be expected based on the characteristics of the interbank market. ; By contrast, however, banks may perceive a stigma from using such facilities, and thus borrow less than what one might expect, thereby reducing the facilities’ effectiveness at reducing interest rate volatility. We develop a model demonstrating these two alternative implications of a standing facility. Empirical predictions of the model are then tested using data from the Federal Reserve’s new primary credit facility and the US federal funds market. A comparison of data from before and after recent changes to the discount window suggests continued reluctance to borrow from the Fed.
|Date of creation:||2004|
|Contact details of provider:|| Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834|
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James A. Clouse & Douglas W. Elmendorf, 1997. "Declining required reserves and the volatility of the federal funds rate," Finance and Economics Discussion Series 1997-30, Board of Governors of the Federal Reserve System (U.S.).
- VanHoose, David D. & Humphrey, David B., 2001. "Sweep accounts, reserve management, and interest rate volatility1," Journal of Economics and Business, Elsevier, vol. 53(4), pages 387-404.
- Brian Madigan & William R. Nelson, 2002. "Proposed revision to the Federal Reserve's discount window lending programs," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 313-319.
- Peter Diamond, 1985. "Search Theory," Working papers 389, Massachusetts Institute of Technology (MIT), Department of Economics.
- Lasser, Dennis J., 1992. "The effect of contemporaneous reserve accounting on the market for federal funds," Journal of Banking & Finance, Elsevier, vol. 16(6), pages 1047-1056, December.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-04-01. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.