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The U.S. Money Market and the Term Auction Facility in the Financial Crisis of 2007-–2009

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  • Tao Wu

    (International Monetary Fund)

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Abstract

The interbank money market in the United States and Europe became turbulent during the financial crisis of 2007-–2009, with the counterparty default risk premiums and liquidity premiums of short-term financing among major financial institutions rising sharply to unprecedented levels. Using various measures of macroeconomic and financial risks, I find that the surges in counterparty risk premiums were predominantly driven by heightened uncertainties about the macroeconomy and financial market, as well as underlying mortgage default risks. The new liquidity facility that the Federal Reserve established, the Term Auction Facility, significantly relieved the strains in the money market, primarily through lowering banks' liquidity concerns. Its effect on the counterparty risk premiums, however, has been quite limited. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 93 (2011)
Issue (Month): 2 (May)
Pages: 617-631

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Handle: RePEc:tpr:restat:v:93:y:2011:i:2:p:617-631

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Cited by:
  1. Rose, Andrew K. & Wieladek, Tomasz, 2012. "Too big to fail: Some empirical evidence on the causes and consequences of public banking interventions in the UK," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2038-2051.
  2. Refet S. Gürkaynak & Jonathan H. Wright, 2013. "Identification and Inference Using Event Studies," Manchester School, University of Manchester, vol. 81, pages 48-65, 09.
  3. Duca, John V., 2010. "Did the Commercial Paper Funding Facility Prevent a Great Depression Style Money Market Meltdown?," MPRA Paper 29255, University Library of Munich, Germany, revised 22 Feb 2011.
  4. Abbassi, Puriya & Linzert, Tobias, 2012. "The effectiveness of monetary policy in steering money market rates during the financial crisis," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 945-954.
  5. Tamakoshi, Go & Hamori, Shigeyuki, 2014. "On cross-currency transmissions between US dollar and euro LIBOR-OIS spreads," Research in International Business and Finance, Elsevier, vol. 30(C), pages 83-90.

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