This study puts forth stationarity considerations in explaining the observed breakdown between aggregate Discount Window borrowing and the spread between the Federal Funds rate and the discount rate during the post-1987 period. Tests with biweekly data indicate stationarity for adjustment borrowing, but cannot reject the unit root for the spread. The Goodfriend–Dutkowsky dynamic implicit cost formulation can accommodate the contrasting stationarity properties. Structural restrictions are compatible with stationary borrowing and a stationary or near integrated spread. While empirical findings from the static model indicate greater bank reluctance to borrow over time, the dynamic model gives considerably less support.

Donald H. Dutkowsky, William G. Foote, Intertemporal Substitution in Macroeconomics: Consumption, Labor Supply, and Money Demand, The Review of Economics and Statistics, Vol. 74, No. 2 (May, 1992), pp. 333-338

The authors derive a model of money demand for an optimizing consumer with rational expectations in a discrete time infinte hortizon framework under uncertainty. Mone y demand responds to unanticipated changes in income, one period expe ctations of future bond and money interest rates, unanticipated curre nt interest rates, and past anticipations of current rates. The deriv ed consumption function mirrors money demand behavior. Joint estimati on of the consumption and money demand equations by weighted nonlinea r least squares corroborates the predicted effects, particularly inco me neutrality. This money demand model substantially outperforms a co nventional specification in post-sample simulation over 1975-85.

A key rationale offered by the Federal Reserve for the payment of interest on reserves was to remove the incentive for banks to operate sweep accounts. Sweeping shifts funds from transactions deposits subject to reserve requirements to non-reservable deposits. This paper extends a conventional banking model to analyze sweeping behavior. Sweeping responds positively to increases in bank loan rates and reserve ratios and negatively to increases in the interest rate on reserves or exogenous increases in bank equity. Sweeping generates greater responsiveness in lending to changes in loan rates or the interest rate on reserves and lower responsiveness to changes in reserve ratios or equity than in its absence. Empirical analysis of an explicit condition that we derive suggests that, with an unchanged reserve requirement, the Fed could eliminate sweeping by setting the interest rate on reserves to no less than approximately 4% points below the market loan rate.

This paper examines the admissibility of monetary aggregate groupings for the US over 1993–2001, based upon weak separability. We investigate the impact of retail and commercial demand deposit sweep programs on the separability of monetary asset groupings. Weak separability is tested using the Swofford–Whitney and Fleissig–Whitney tests. We use Varian's measurement error adjustment procedure to eliminate violations of the Generalized Axiom of Revealed Preference (GARP). When funds from both retail and commercial demand deposit sweep programs are placed within checkable deposits, all groupings, narrow and broad, pass GARP and weak separability. For groupings based on conventional money measures, tests tend to favor broad aggregates.