Discount Window Borrowing after 2003: The Explicit Reduction in Implicit Costs

Selva Demiralp and Erhan Artuç

TÜSİAD-Koç University Economic Research Forum Working Papers from TUSIAD-Koc University Economic Research Forum

Abstract: In January 2003, the Federal Reserve introduced primary credit as its main discount window lending program. The primary credit program replaced the adjustment credit program, which, subject to a number of restrictions, had generated a stigma associated with borrowing from the Fed. Eliminating or lessening the stigma of borrowing was viewed as essential for reducing the reluctance to borrow and strengthening the traditional role of the discount window as a safety valve when reserve markets tighten unexpectedly. In this paper we estimate the borrowing function prior to and after the introduction of the new facility and develop a daily model of borrowing. Using this model, we estimate the implicit cost associated with borrowing for the first time in the literature via “indirect inference” a la Gourieroux, Monfort and Renault (1993). Our results suggest that the stigma associated with borrowing from the Fed is significantly reduced in the post 2003 period.

Keywords: Discount Window; Primary Credit; Federal Funds Market (search for similar items in EconPapers)
JEL-codes: E40 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2007-10
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Persistent link: http://EconPapers.repec.org/RePEc:koc:wpaper:0708

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