Discount Window Borrowing after 2003: The Explicit Reduction in Implicit Costs
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.
|Date of creation:||Oct 2007|
|Date of revision:|
|Contact details of provider:|| Postal: Rumelifeneri Yolu, Sarıyer, 34450 İstanbul|
Web page: http://erf.ku.edu.tr
More information through EDIRC
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.:
- Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages S63-84, Suppl. De.
- Demiralp, Selva & Farley, Dennis, 2005.
"Declining required reserves, funds rate volatility, and open market operations,"
Journal of Banking & Finance,
Elsevier, vol. 29(5), pages 1131-1152, May.
- Selva Demiralp & Dennis Farley, 2003. "Declining required reserves, funds rate volatility, and open market operations," Finance and Economics Discussion Series 2003-27, Board of Governors of the Federal Reserve System (U.S.).
- Pearce, Douglas K, 1993. "Discount Window Borrowing and Federal Reserve Operating Regimes," Economic Inquiry, Western Economic Association International, vol. 31(4), pages 564-79, October.
- Carpenter, Seth & Demiralp, Selva, 2006.
"Anticipation of Monetary Policy and Open Market Operations,"
704, University Library of Munich, Germany.
- Seth B. Carpenter & Selva Demiralp, 2006. "Anticipation of Monetary Policy and Open Market Operations," International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
- William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
- Gourieroux, C & Monfort, A & Renault, E, 1993.
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 8(S), pages S85-118, Suppl. De.
- Stephen M. Goldfeld & Edward J. Kane, 1966. "The Determinants Of Member‐Bank Borrowing: An Econometric Study," Journal of Finance, American Finance Association, vol. 21(3), pages 499-514, 09.
- Furfine, Craig, 2001. "The reluctance to borrow from the Fed," Economics Letters, Elsevier, vol. 72(2), pages 209-213, August.
- Marvin Goodfriend, 1981.
"Discount window borrowing, monetary policy, and the post-October 6, 1979 Federal Reserve operating procedure,"
81-02, Federal Reserve Bank of Richmond.
- Goodfriend, Marvin, 1983. "Discount window borrowing, monetary policy, and the post-October 6, 1979 federal reserve operating procedure," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 343-356, September.
- Clouse, James A. & Dow Jr., James P., 1999. "Fixed costs and the behavior of the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 23(7), pages 1015-1029, July.
- 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.
- Nautz, Dieter & Schmidt, Sandra, 2008.
"Monetary Policy Implementation and the Federal Funds Rate,"
ZEW Discussion Papers
08-025, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Nautz, Dieter & Schmidt, Sandra, 2009. "Monetary policy implementation and the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 33(7), pages 1274-1284, July.
- Liu, Ming-Hua & Margaritis, Dimitri & Tourani-Rad, Alireza, 2008. "Monetary policy transparency and pass-through of retail interest rates," Journal of Banking & Finance, Elsevier, vol. 32(4), pages 501-511, April.
- Dutkowsky, Donald H., 1993. "Dynamic implicit cost and Discount Window borrowing : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 105-120, August.
- Furfine, Craig, 2003. "Standing Facilities and Interbank Borrowing: Evidence from the Federal Reserve's New Discount Window," International Finance, Wiley Blackwell, vol. 6(3), pages 329-47, Winter.
- Ali Darrat & Khaled Elkhal & Gaurango Banerjee & Maosen Zhong, 2004. "Why do US banks borrow from the Fed? A fresh look at the 'reluctance' phenomenon," Applied Financial Economics, Taylor & Francis Journals, vol. 14(7), pages 477-484.
- Jiang, George & Yan, Shu, 2009. "Linear-quadratic term structure models - Toward the understanding of jumps in interest rates," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 473-485, March.
When requesting a correction, please mention this item's handle: RePEc:koc:wpaper:0708. 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: (Sumru Oz)
If references are entirely missing, you can add them using this form.