| Abstract: | The purpose of this note is to evaluate the appropriate discount rate policy rules consistent with minimization of the variability of borrowing at the Federal Reserve discount window. In the context of Goodfriend's (1983) model of the bank borrowing decision, it is demonstrated that either a penalty rate or a subsidy rate policy will produce minimized variability of borrowing, so long as the subsidy rate adjusts point for point to changes in the value of the Federal funds rate. These policy rules are compatible with a policy procedure designed to target borrowed or non-borrowed reserves. If the Fed does not adhere to one of these specific rules, minimization of borrowing variability requires an open market procedure in which the Fed pegs the Federal funds rate. |
