Abstract
We employ threshold cointegration methodology to model the policy problem solved by the Federal Reserve System in their manipulation of the discount rate under a reserves target operating procedure utilized since October 1979. The infrequent and discrete adjustments that characterize movements in the discount rate instrument vis-a-vis the Federal Funds rate do not lend themselves to a linear cointegration framework. The inherently nonlinear relationship arising from the Fed's self-imposed constraints on discontinuously changing the discount rate is satisfactorily modelled as an instance of threshold cointegration between the discount rate and the Federal Funds rate.
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Baum, C.F., Karasulu, M. Modelling Federal Reserve Discount Policy. Computational Economics 11, 53–70 (1997). https://doi.org/10.1023/A:1008622613557
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DOI: https://doi.org/10.1023/A:1008622613557