To deal with this problem, in October 1979 the Fed instituted a new, so-called
nonborrowed reserve operating procedure.
For example, Goodfriend (1993, 4) argues that "it is more accurate to refer to the period from October 1979 to October 1982 as one of aggressive federal funds rate targeting than one of
nonborrowed reserve targeting.
In the intermediate case of
nonborrowed reserve targeting (not illustrated), the price level falls by less, reflecting the fact that the money supply function in this case is interest elastic.
In this model, open market operations are equivalent to
nonborrowed reserve balances.
The instruments for the 2SLS estimates are the predetermined right-hand-side variables, lagged values of the endogenous right-hand-side variables, and the levels of required reserves and
nonborrowed reserves, both of which are exogenous under
nonborrowed reserve targeting and lagged reserve accounting.
Subtracting the FOMC-specified level of discount window borrowing from this forecast of reserve demand yields the
nonborrowed reserve path, the Desk's prime objective.
The annual growth rates of employment, M2, and the
nonborrowed reserve ratio as well as inflation, and inflation in sensitive commodities, are calculated as the 12th difference of the logarithms of the levels.
Empirical studies on policy rules tend to split the sample in 1979 or to use data series beginning sometime after October 1982 when the
nonborrowed reserve operating procedure was abandoned.
7) The change adopted an operating procedure based on management of
nonborrowed reserves, with the intention of focusing policy on controlling the growth of MI and M2 (Bernanke, 2006).
It has been argued that the period of
nonborrowed reserves targeting (1979-1982), also known as the "Volcker Experiment" was a period of excessive volatility, and it might have played a significant role in the estimation of monetary policy shocks.
The demand for borrowed reserves theoretically reflects the tightness of credit conditions in the
nonborrowed reserves market.
Maisel's view received little support from most other members and opposition from the president of the Federal Bank of New York, Alfred Hayes, who asserted: "It had not been demonstrated that total or
nonborrowed reserves had any strong or direct effects on the ultimate goals of the economy" (Board of Governors 1973: 21).
