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A Black Swan in the Money Market

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Author Info
John B. Taylor
John C. Williams

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Abstract

The recent financial crisis saw a dramatic and persistent jump in interest rate spreads between overnight federal funds and longer - term interbank loans. The Fed took several actions to reduce these spreads including the creation of the Term Auction Facility (TAF). The effectiveness of these policies depends on the cause of the increased spreads such as counterparty risk, liquidity, or other factors. Using a no-arbitrage pricing framework and various measures of risk, we find robust evidence that increased counterparty risk contributed to the rise in spreads but do not find robust evidence that the TAF had a significant effect on spreads. (JEL E43, E44, E52, G21)

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Publisher Info
Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 1 (2009)
Issue (Month): 1 (January)
Pages: 58-83
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Handle: RePEc:aea:aejmac:v:1:y:2009:i:1:p:58-83

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. anonymous, 2008. "Monetary policy report to the Congress," Web Site, Board of Governors of the Federal Reserve System (U.S.), issue Jul. [Downloadable!]
  2. Anderson, Richard G & Rasche, Robert H, 1982. "What Do Money Market Models Tell Us about How to Implement Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 796-828, November. [Downloadable!] (restricted)
  3. Michael Melvin & Vincentiu Covrig & Buen Low, . "A Yen is not a Yen: TIBOR/LIBOR and the determinants of the 'Japan Premium'," Working Papers 2133360, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
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  4. John P. Judd & John L. Scadding, 1982. "What do money market models tell us about how to implement monetary policy: reply," Working Papers in Applied Economic Theory 108, Federal Reserve Bank of San Francisco.
  5. anonymous, 2008. "Monetary policy report to the Congress," Web Site, Board of Governors of the Federal Reserve System (U.S.), issue Feb. [Downloadable!]
  6. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Felix Geiger & Oliver Sauter, 2009. "Deflationary vs. Inflationary Expectations - A New-Keynesian Perspective with Heterogeneous Agents and Monetary Believes," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 312/2009, Department of Economics, University of Hohenheim, Germany. [Downloadable!]
  2. Cho-Hoi Hui & Hans Genberg & Tsz-Kin Chung, 2009. "Funding Liquidity Risk and Deviations from Interest-Rate Parity During the Financial Crisis of 2007-2009," Working Papers 0913, Hong Kong Monetary Authority. [Downloadable!]
  3. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2009. "Do central bank liquidity facilities affect interbank lending rates?," Working Paper Series 2009-13, Federal Reserve Bank of San Francisco. [Downloadable!]
  4. John B. Taylor, 2008. "The Mayekawa Lecture: The Way Back to Stability and Growth in the Global Economy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 26, pages 37-48, December. [Downloadable!]
  5. Maurice Obstfeld, 2009. "Lenders of Last Resort in a Globalized World," IMES Discussion Paper Series 09-E-18, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
    Other versions:
  6. Stephen G. Cecchetti, 2008. "Crisis and Responses: the Federal Reserve and the Financial Crisis of 2007-2008," NBER Working Papers 14134, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Tao Wu, 2008. "On the effectiveness of the Federal Reserve's new liquidity facilities," Working Papers 0808, Federal Reserve Bank of Dallas. [Downloadable!]
  8. Jens Eisenschmidt & Jens Tapking, 2009. "Liquidity risk premia in unsecured interbank money markets," Working Paper Series 1025, European Central Bank. [Downloadable!]
  9. Adam B. Ashcraft & Morten L. Bech & W. Scott Frame, 2008. "The Federal Home Loan Bank System: the lender of next-to-last resort?," Staff Reports 357, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  10. Daniel L. Thornton, 2009. "The Fed, liquidity, and credit allocation," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 13-22. [Downloadable!]
  11. James McAndrews & Asani Sarkar & Zhenyu Wang, 2008. "The effect of the Term Auction Facility on the London Inter-Bank Offered Rate," Staff Reports 335, Federal Reserve Bank of New York. [Downloadable!]
  12. Naohiko Baba & Frank Packer, 2008. "Interpreting deviations from covered interest parity during the financial market turmoil of 2007-08," BIS Working Papers 267, Bank for International Settlements. [Downloadable!]
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This page was last updated on 2009-11-26.


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