Tuesday, March 25, 2008

Changes to the previous post

After reading comments from readers and doing my homework I've made some changes to the previous post, where I describe recent innovations in the Federal Reserve's modus operandi. The text in bold face is either new or has been rewritten from the previous version. I've also added a couple of tables to illustrate what happens to the balance sheet in the case of TSLF and PDCF loans.

This is a summary of the changes:

1. The range of collateral for TSLF loans is the same as that for TAF loans, which is the same as for the discount window. This range is wider, however, than for repurchase agreements.

2. The TSLF is a bonds-for-bonds transaction, and therefore doesn't change the monetary base. The Federal Reserve takes possession of the borrower's securities for 28 days, and lends government securities. The PDCF is a cash-for-bonds transaction, which does change the monetary base. The Fed will offset PDCF loans by conducting direct purchases of government securities, reverse repos, or by letting its Treasurys expire.

Thanks to everyone who left a comment or sent me an e-mail.

1 comment:

john jansen said...

Francisco. That is a great summary and a great tool. Nice work.