The federal reserve operating procedure, 1984–1990: An empirical analysis

Abstract

The operating procedure employed by the Federal Reserve has important implications for the behavior of interest rates and money growth. We present a simple theoretical model that encompasses both a Federal Funds Rate operating procedure and a Borrowed Reserves operating procedure. We then examine a VAR model of the reserve market from February 1984 through April 1990 to ascertain the actual behavior of reserves and interest rates. Comparing the alternative predictions of the theoretical model with the results of the estimated VAR model gives us another perspective on the operating procedure employed by the Federal Reserve. The evidence suggests that the Fed's operating procedure has been closer to a Borrowed Reserve than to a Federal Funds Rate procedure.

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