Financial Crises As the Failure of Arbitrage: Implications for Monetary Policy
AbstractThis paper attempts to view financial crises as the failure of arbitrage among financial markets, and takes the "Japan premium" phenomenon observed in offshore money markets as an important example in favor of this view. In addition, we reconsider, from this perspective, the open market operations conducted b a central bank during a period of financial distress. The paper first derives from the existing theoretical literature several implications regarding how arbitrage among markets is prevented when financial institutions such as investors and intermediaries suffer from severe liquidity constraints, and then examines empirically such theoretical implications using the data available from offshore money markets. Given these implications, explored both theoretically and empirically, the paper finally discusses a possible role played by a central bank in recovering market liquidity when markets are segmented in the absence of financial arbitrage.
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Bibliographic InfoArticle provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.
Volume (Year): 19 (2001)
Issue (Month): S1 (February)
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- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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