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

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 accociated 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 examine the performance of the new facility by developing a daily model of borrowing. Using this model we estimate the implicit cost associated with borrowing via the method of simulated moments for first time in the literature. We also estimate the borrowing function prior to and after the introduction of the new facility. 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

JEL Classification: E40, E58