Forecasting discount window borrowing

Abstract

This paper compares the predictive performance of five recent models of banks' demand for borrowed reserves using post-sample simulation. The findings indicate that models which incorporate observed nonlinearity and switching in the borrowings-interest rate spread relationship outperform the linear nonswitching model. However, the best performance is obtained from the model in which switching and aggregation are considered in the theoretical derivation. Forecasting the level of borrowed reserves is critical to the FOMC reserve targeting procedure. Hence, a comparison of model robustness and stability using post-sample simulation provides useful information to the FOMC in its search for a reliable borrowed reserves demand model.