Discount window loans have to be collateralized to the satisfaction of the lending Reserve Bank, and it is noteworthy that all of the Federal Reserve System’s lending during the Great Financial Crisis was collateralized and that all the loans have been repaid in full, on time, and with interest.
A lower target could further reduce distortions stemming from incomplete indexation of nominal contracts and the tax system, and the disincentives for holding money. The Bank’s research leading up to the 2011 renewal strengthened the case for lowering the target. However, our research and the experience of the crisis also highlighted the sizeable risks associated with the ZLB.