Administering the window: A game-theoretic model of discount-window borrowing

doi:10.1016/0304-3932(90)90016-W

Journal of Monetary Economics

Volume 25, Issue 2, March 1990, Pages 273-287

https://doi.org/10.1016/0304-3932(90)90016-W Get rights and content

Abstract

This paper presents a game-theoretic model of nonprice rationing at the discount window. It focuses on the Federal Reserve's use of frequency guidelines and harassment to deter ‘excessive’ use of the discount window by banks. The model investigates the role of the discount officer, the effect of uncertainty, and the credibility of threats used by the discount officer to deter excessive borrowing by banks.

References (7)

Marvin Goodfriend
Discount window borrowing, monetary policy, and the post-October 6, 1979 Federal Reserve operating procedure
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David M. Kreps et al.
Reputation and imperfect information
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Federal Reserve Board of Governors
Reappraisal of the Federal Reserve discount mechanism
(1971)

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Cited by (9)

The discount window and credit availability
1999, Journal of Banking and Finance
This paper models the impact of the discount window on decisions of individual banks facing regulatory capital requirements and stochastic deposit supply. A central result is that banks may choose a larger lending capacity if the discount window is available than if it is not. Moreover, if the cost of capital is higher during recessions, banks may then avoid the window, contributing to the downturn. A discontinuous interaction emerges between risk-based capital requirements and use of the discount window, with a more stringent capital requirement inducing some banks to hold less capital.
An empirical investigation of the determinants of discount window borrowing: a disaggregate analysis
1994, Journal of Banking and Finance
This article investigates the individual demand for discount window credit by employing a cross-sectional time-series database of commercial banks. The analysis employs a simple linear model that accounts for the latent nature of individual borrowing. Our findings reveal that borrowing is positively correlated with the federal funds-discount rate spread. Large borrowers are shown to have a stronger correlation between borrowing and the federal funds spread. In addition, we find that the nonpriee mechanism is more binding on large banks that avoid contiguous use of the discount facility or defer their visit in the expectation that interest rates will increase in the near future.
Discount window borrowing across federal reserve districts: Evidence under contemporaneous reserve accounting
1992, Journal of Banking and Finance
In recent years, bank borrowing at the discount window has been less reliably related to the spread between the Federal funds rate and the discount rate, complicating the implementation of the borrowed reserves targeting procedure of the Federal Reserve. This paper investigates borrowing across Federal Reserve districts to see if there are significant differences in borrowing behavior across bank size and discount window administrations. The results suggest that borrowing behavior does differ across districts, that standard borrowing models are least satisfactory in explaining the borrowing of large banks, and that borrowing behavior changed after the 1987 stock market crash. The gains in explanatory power from disaggregation, however, are not large.
Financial volatility and optimal instrument choice: A revisit to Poole's analysis
2010, Economics Bulletin
Capital requirements and rational discount-window borrowing
1998, Journal of Money, Credit and Banking
A model of the federal funds market
1996, Economic Theory

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^∗: I am deeply indebted to Roy Gardner, Dave VanHoose, and an anonymous referee for their comments on this paper. I also want to thank Elmus Wicker and the members of the Indiana Money and Banking Seminar for comments received on earlier versions of this paper.

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Administering the window: A game-theoretic model of discount-window borrowing

Abstract

Journal of Monetary Economics

Journal of Economic Theory

Reappraisal of the Federal Reserve discount mechanism