Borrowed Reserves Research Articles

Money Matters: There is No Such Thing as a Money 'Supply'

Monetary literature remains plagued by references to money “supply” at a time when the endogeneity of money is becoming generally accepted. Money endogeneity is not a hypothesis; it is a fact, and one that has existed since a goldsmith-banker wrote out the first receipt (bank note) and handed it to a borrower (as opposed to a depositor of gold coins). The creation of money has always been endogenous, even under the Friedman-Schwartzian Monetarist fixed-money-rule model. Once this is accepted, then it is logical to refer to the quantity or stock of money, and to the supply of bank credit. The household, corporate and government sectors borrow from banks to consume (C) or invest (I), which are the major components of nominal GDP [C + I + net exports (= aggregate demand, AD)]. Domestic credit extension (DCE) thus represents the link between the monetary and real economies. Money creation is the outcome of the change in DCE; the latter, not the change in M, approximates the change in AD (there are other influences). The essence of monetary policy is that the central bank controls the (reference) prime lending rate (PR) of banks via its policy interest rate (PIR), and thereby the demand for bank credit. It controls PR in normal (ie non-QE) times by manipulating the liquidity of banks to a borrowed reserves condition (actual, close to, or threat of), in order to make the PIR effective. The causation path is clear.

Borrowed reserves and deposit variation: The risks to monetary policy

A theory of bank reserves is presented with emphasis on the behavior of borrowed reserves, the Federal Reserve's operating instrument. The theory explains the observed nonlinear relationship between borrowing and the spread between the federal funds rate and the discount rate. The theory shows that borrowed reserves are also a function of deposit variation. A shift in bankers' perceptions of deposit variation can cause borrowed reserves demand to shift so that the level of borrowing is not a reliable indicator of the degree of reserve pressure. Since borrowed reserves are used as the Federal Reserve's operating instrument, problems such as these pose substantial risks to the implementation of monetary policy.

Inside Money, Outside Money, and Short-Term Interest Rates

This paper presents a quantitative general equilibrium model with multiple monetary aggregates. The framework incorporates a banking sector and distinguishes between M1, the monetary base, currency and various measures of reserves: total, excess and non borrowed. We use a variant of the model to analyze two sets of empirical facts. The first set of facts is that different monetary aggregates covary differently with short term nominal interest rates. Broad monetary aggregates like M1 and the monetary base covary positively with current and future values of short term interest rates. In contrast, the non borrowed reserves of banks covary negatively with current and future interest rates. Observations like this `sign switch' lie at the core of recent debates about the effects of monetary policy actions on short term interest rates. According to our model, the sign switch occurs because movements in non borrowed reserves are dominated by exogenous shocks to monetary policy, while movements in the base and M1 are dominated by endogenous responses to non-policy shocks. The second set of facts that we consider is that broad monetary aggregates covary positively with output. We quantify the Friedman and Schwartz hypothesis that this covariation reflects the effects of exogenous shocks to monetary policy, and the hypothesis that they reflect the endogenous response of monetary aggregates to shocks in the private economy.

The federal reserve operating procedure, 1984–1990: An empirical analysis

The operating procedure employed by the Federal Reserve has important implications for the behavior of interest rates and money growth. We present a simple theoretical model that encompasses both a Federal Funds Rate operating procedure and a Borrowed Reserves operating procedure. We then examine a VAR model of the reserve market from February 1984 through April 1990 to ascertain the actual behavior of reserves and interest rates. Comparing the alternative predictions of the theoretical model with the results of the estimated VAR model gives us another perspective on the operating procedure employed by the Federal Reserve. The evidence suggests that the Fed's operating procedure has been closer to a Borrowed Reserve than to a Federal Funds Rate procedure.

Forecasting discount window borrowing

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.

Monetary Control Under Alternative Operating Procedures

This paper provides a detailed examination of various money stock control procedures in a rational expectations environment. The analysis investigates the relative efficiency of controlling monetary aggregate through the use of an interest rate instrument or through various reserve measures under both lagged and contemporaneous reserve requirements. A major result is that borrowed reserve targeting is not necessarily equivalent to a noisy interest rate instrument. Further, it is possible that borrowed reserves can represent a more efficient control procedure than in interest rate instrument. However, total reserve targeting under contemporaneous reserve requirements generally provides the most efficient control of money and the lowest variability of prices and output. However, total reserve targeting also implies higher interest rate volatility, which may be one reason why the Fed has never adopted this procedure.

Reserves Announcements and Interest Rates: Does Monetary Policy Matter?

The author provides evidence on the perceived existence of strong liquidity effect. The analysis is based on the response of the term structure of interest rates to the weekly Federal Reserve announcements of bank reserves during the post-October 1979 period. It is shown that unanticipated changes in the mix between borrowed and nonborrowed reserves cause expected real interest rates to change after the announcement because they provide information about a future change in the supply of money. A precise model is developed and tested during subperiods of nonborrowed and borrowed reserves targeting by the Fed.

Reserves Announcements and Interest Rates: Does Monetary Policy Matter?

The author provides evidence on the perceived existence of strong liquidity effect. The analysis is based on the response of the term structure of interest rates to the weekly Federal Reserve announcements of bank reserves during the post-October 1979 period. It is shown that unanticipated changes in the mix between borrowed and nonborrowed reserves cause expected real interest rates to change after the announcement because they provide information about a future change in the supply of money. A precise model is developed and tested during subperiods of nonborrowed and borrowed reserves targeting by the Fed.

Controlling the Borrowed Reserves of Scheduled Commercial Banks in India

Controlling the Borrowed Reserves of Scheduled Commercial Banks in India

Switching, Aggregation, and the Demand for Borrowed Reserves

Switching, Aggregation, and the Demand for Borrowed Reserves

Reserves vs. federal funds operating monetary procedures

Abstract The recently adopted reserves-operating target is compared to the old regime. It is found that: (a) the structure of the monetary system is changed, (b) success of the new regime hinges on understanding of the role of borrowed reserves, (c) a major reason for the recent violent gyrations in monetary aggregates—as well as in interest rates—is the Federal Reserve's formula for forecasting borrowed reserves.