Proposed Reforms of Discounting

Advantages

1. Lender of Last Resort Role

Disadvantages

1. Confusion interpreting discount rate changes

2. Fluctuations in discount loans cause unintended fluctuations in money supply

3. Not fully controlled by Fed

Proposed Reforms

1. Abolish discounting (Milton Friedman)

A. Eliminates fluctuations in Ms

B. However, lose lender of last resort role

2. Tie discount rate to market rate

A. i ñ id = constant, so less fluctuations of DL and Ms

B. Easier administration

C. No false announcement signals

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