Discount Rate Policy Under Alternative Operating Regimes: An Empirical Investigation

This paper uses a limited dependent variable approach to model the probability that the Federal Reserve will change its discount rate over a oneweek horizon. The model assumes that the. Federal Reserve looks at the spread between the federal funds rate and the discou~t rate, the level of bank borrowing at the discount window, movements in the foreign exchange value of the dollar, the rate of gr~wth in the money supply, and general economic conditions.when deciding whether to change the discount rate. The specific factors that affect the probability of a discount rate change should depend on the operating procedure that the Fed uses. We test this hypothesis by comparing discount rate policy under the federal funds rate targeting procedure (prior to October 1979), the nonborrc>wed reserves targeting procedure (October 1979 to October.1982), and the borrowed reserves targeting procedure (after October 1982). We find evidence that discount rate policy was substantially different under each of the three operating procedures.