Atlantic Economic Journal

, Volume 25, Issue 3, pp 297–306 | Cite as

Borrowed reserves and deposit variation: The risks to monetary policy

  • Michael L. Tindall
  • Roger W. Spencer
Articles

Abstract

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.

Keywords

Monetary Policy Discount Rate International Economic Public Finance Reliable Indicator 

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Copyright information

© International Atlantic Economic Society 1997

Authors and Affiliations

  • Michael L. Tindall
    • 1
  • Roger W. Spencer
    • 1
  1. 1.New York University and Trinity UniversityUSA

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