Relationships among weekly money market time series, 1969-1982

This paper compares the empirical properties of the Federal funds rate targeting regime followed by the FOMC during most of the 1970’s with that of the nonborrowed reserves regime which was in place from the fall of 1979 through the summer of 1982. Because of the seemingly greater fluctuation in money and interest rates in this latter period, many have concluded that this nonborrowed reserves regime was a failure. Using a vector autoregressive framework based on weekly observations on three variables-the federal funds rate, discount window borrowing, and transaction deposits-the authors find, on the contrary, that the nonborrowed regime tended to stabilize the unconditional coefficients of dispersion of each of these three key money market variables relative to what was obtained during the period in which the federal funds was the short-run operating instrument. While there is unquestionably greater short-run variability in the nonborrowed reserve’s regime, the present estimates of the implied coefficients of dispersion suggest a considerably greater degree of long-run stability in the money market in the nonborrowed period than most analysts have suspected.