(19) Nonborrowed reserves
are the difference between total reserves and reserves from the Fed's discount window.
Eventually, the Volcker FOMC stopped short-term interest rate control and claimed that the target was nonborrowed reserves
. To avoid blame for the increase in interest rates, the market gained more freedom to change short-term interest rates.
More to the point, 30 or more years' experience of a federal funds rate above the discount rate has shown no tendency for borrowed reserves to replace nonborrowed reserves
because the Reserve Banks guarded against arbitrage.
In September, the Bank of Mexico added 100 billion pesos to the amount by which it leaves the banking system "short" of nonborrowed reserves
. This was expected to increase the year's run-up in short-term interest rates, which is already several hundred basis points.
The supply of reserves is depicted as a kinked schedule: a perfectly inelastic supply-of-reserves section corresponding to the level of nonborrowed reserves
determined by open market operations, and an upward-sloping section corresponding to discount-window borrowing.
Whether we measure money by nonborrowed reserves
or more broadly, injections of money are not the same as withdrawals of, say, Treasury bills (T-bills).
With nonborrowed reserves
ignored, all reserves were borrowed reserves [R.sub.B] such that R = [R.sub.B].
The fourth section presents the model in the form of a Taylor series expansion, and the fifth section extends the theory to excess reserves, free reserves, total reserves, and nonborrowed reserves
. The sixth section examines the case where interest is paid on required reserves and excess reserves, and the last section presents the conclusions.
Christiano and Eichenbaum (1992) use nonborrowed reserves
to establish the association between monetary liquidity and interest rate variations.
I use the results presented by Bernanke and Blinder (1992) that the supply of nonborrowed reserves
is infinitely elastic within the month to restrict the relationship between innovations in output growth, inflation and the federal funds rate.
monetary policy variables: exogenous shocks either to the federal funds rate or to the ratio of nonborrowed reserves
to total reserves, and movements in the Romer and Romer index of monetary policy contractions.(2) A robust finding across these monetary policy measures was that an expansionary U.S.
As Friedman (1983, 1984) has argued, the heightened variability of money growth corresponding to the Federal Reserve's October 1979 shift to nonborrowed reserves
targeting, generated uncertainty about monetary policy.