Discount Window Stigma After the Global Financial Crisis

The rapidity of deposit outflows during the March 2023 banking run highlights the important role that the Federal Reserve’s discount window should play in strengthening financial stability. A lack of borrowing, however, has plagued the discount window for decades, likely due to banks’ concerns about stigma—that is, their unwillingness to borrow at the discount window because it may be viewed as a sign of financial weakness in the eyes of regulators and market participants. The discount window has been reformed several times to alleviate this problem. Although the presence of stigma during the great financial crisis has been documented empirically, we do not know whether stigma has remained since then. In this post, based on a recent Staff Report, we fill this gap by using transaction-level data from the federal funds market to examine whether the discount window remains stigmatized today.
The Central Banking Beauty Contest

Expectations can play a significant role in driving economic outcomes, with central banks factoring market sentiment into policy decisions and market participants forming their own assumptions about monetary policy. But how well do central banks understand the expectations of market participants—and vice versa? Our model, developed in a recent paper, features a dynamic game between (i) a monetary authority that cannot commit to an inflation target and (ii) a set of market participants that understand the incentives created by that credibility problem. In this post, we describe the game, a type of Keynesian beauty contest: its main novelty is that each side attempts, with varying degrees of accuracy, to forecast the other’s beliefs, resulting in new findings regarding the levels and trajectories of inflation.
Can Discount Window Stigma Be Cured?

One of the core responsibilities of central banks is to act as “lender of last resort” to the financial system. In the U.S., the Federal Reserve has been operating as a lender of last resort through its “discount window” (DW) for more than a century. Historically, however, the DW has been plagued by stigma—banks’ reluctance to use the DW, even for benign reasons, out of concerns that it could be interpreted as a sign of financial weakness. In this post, we report on new research showing that once a DW facility is stigmatized, removing that stigma is difficult.