Compliance with the three-year precautionary SBA's main performance criteria (the primary surplus target and a floor on non-borrowed reserves
) and structural benchmarks, including financial sector and central bank reform, has bolstered confidence in Jamaica's policy framework.
The Federal Reserve has loaned out billions to a banking system that finds it has no non-borrowed reserves
, something that has never happened before.
The same models were then estimated for the non-borrowed reserves target period, with the results reported in the third and fourth columns of Table V.
"Short-Run Monetary Control, Evidence Under a Non-Borrowed Reserves Operating Procedure." Journal of Monetary Economics, January 1984, 87-111.
To investigate this possibility, two other policy instruments were considered, the adjusted monetary base and non-borrowed reserves. The evidence of monetary policy actions on short-term interest rates generally is strongest if non-borrowed reserves is used as the policy instrument |see Thornton (1988) and Christiano and Eichenbaum (forthcoming)~.
Other policy instruments such as the monetary base or non-borrowed reserves would yield similar results.
One interpretation is that Federal Reserve announcements of discount rate changes, on which the technical/non-technical classifications are based, take on special importance during periods when the Fed is targeting non-borrowed reserves. To learn about this, we add a dummy variable, which equals one when there is a non-technical change during the 1979-82 period, into |Z.sub.t~ in the prior probabilities of equation 2 of the mixture model.(14) The sum of squared forecast errors is reported in table 4 under forecast 2.
Overall, the mixture model with time-varying prior probabilities fits the changes in the T-bill rate better than the technical/non-technical regression; it also provides better one-step-ahead forecasts, given that the prior probabilities use information about whether the change is technical or non-technical during periods when the operating target is non-borrowed reserves. Furthermore, the variables determining the prior probabilities of the two response levels may reveal something about the market's beliefs about discount rate policy.
The mixture model yields superior results with the single exception of forecasting T-bill responses during the 1979-82 period of non-borrowed reserves targeting.
This policy shift, from an interest rate target regime to a non-borrowed reserves
target regime, was widely considered as tacit acceptance of the monetarist doctrine.