Borrowed reserves targeting and nominal income smoothing

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This paper provides a theoretical analysis of the Federal Reserve's borrowed-reserves-targeting procedure. In the context of a model in which nonborrowed reserves are varied to achieve, on average, an intraperiod target level of borrowing that is consistent with an objective involving interperiod variability of nominal income, it is demonstrated that periodic adjustments of the borrowings target generally are optimal. In turn, the amount and direction of the target adjustment are conditioned to the deviation of actual borrowings from the borrowings target set in the previous period and depend upon the values of structural parameters and the sources and magnitudes of exogeneous disturbances. It is argued that actual Federal Reserve behavior is not inconsistent with these implications of the model.