Reserve Targeting and Discount Policy
Paul L. Kasriel, Randall C. Merris
The recent approval in principle by the Board of Governors of the Federal Reserve System of a return to a modified form of contemporaneous reserve accounting raises important questions regarding the role of Federal Reserve discount policy. This article analyzes the factors that enter into an individual bank's decision to borrow from the Fed for short-term reserve adjustment purposes and how the borrowing function for the banking system relates to the determination of the federal funds rate—the "cutting edge" of monetary policy in terms of the money supply process. Finally, it briefly discusses the implications for discount policy of the proposed move to a modified form of contemporaneous reserve accounting.
