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Discount Window Borrowing after 2003: The Explicit Reduction in Implicit Costs

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  • Selva Demiralp

    () (Department of Economics, Koç University)

  • Erhan Artuç

    (Department of Economics, Koç University)

Abstract

In January 2003, the Federal Reserve introduced primary credit as its main discount window lending program. The primary credit program replaced the adjustment credit program, which, subject to a number of restrictions, had generated a stigma associated with borrowing from the Fed. Eliminating or lessening the stigma of borrowing was viewed as essential for reducing the reluctance to borrow and strengthening the traditional role of the discount window as a safety valve when reserve markets tighten unexpectedly. In this paper we estimate the borrowing function prior to and after the introduction of the new facility and develop a daily model of borrowing. Using this model, we estimate the implicit cost associated with borrowing for the first time in the literature via “indirect inference” a la Gourieroux, Monfort and Renault (1993). Our results suggest that the stigma associated with borrowing from the Fed is significantly reduced in the post 2003 period.

Suggested Citation

  • Selva Demiralp & Erhan Artuç, 2007. "Discount Window Borrowing after 2003: The Explicit Reduction in Implicit Costs," Koç University-TUSIAD Economic Research Forum Working Papers 0708, Koc University-TUSIAD Economic Research Forum.
  • Handle: RePEc:koc:wpaper:0708
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Gabriel Pérez Quirós & Hugo Rodríguez Mendizábal, 2012. "Asymmetric Standing Facilities: An Unexploited Monetary Policy Tool," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(1), pages 43-74, April.
    2. Stephen G. Cecchetti, 2008. "Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-2008," NBER Working Papers 14134, National Bureau of Economic Research, Inc.
    3. Klee, Elizabeth, 2010. "Operational outages and aggregate uncertainty in the federal funds market," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2386-2402, October.
    4. Huberto Ennis & John Weinberg, 2013. "Over-the-counter loans, adverse selection, and stigma in the interbank market," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(4), pages 601-616, October.
    5. repec:eee:jbfina:v:83:y:2017:i:c:p:193-220 is not listed on IDEAS
    6. Erhan Artuç & Selva Demiralp, 2010. "Provision of liquidity through the primary credit facility during the financial crisis: a structural analysis," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 43-53.
    7. Elizabeth C. Klee, 2011. "The first line of defense: the discount window during the early stages of the financial crisis," Finance and Economics Discussion Series 2011-23, Board of Governors of the Federal Reserve System (U.S.).
    8. Helwege, Jean & Boyson, Nicole M. & Jindra, Jan, 2017. "Thawing frozen capital markets and backdoor bailouts: Evidence from the Fed's liquidity programs," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 92-119.
    9. Stephen G. Cecchetti, 2009. "Crisis and Responses: The Federal Reserve in the Early Stages of the Financial Crisis," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 51-75, Winter.

    More about this item

    Keywords

    Discount Window; Primary Credit; Federal Funds Market;

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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