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Central Bank Responses to the Money Market Turmoil Stemming from Subprime Woes: Review of the Initial Phase from August 2007 until July 2008

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  • Financial Markets Department

    (Bank of Japan)

Abstract

The monetary operations of central banks generally consist of the following three components: reserve requirements, open market operations, and standing facilities. However, details differ depending on operating targets, financial market environments and historical factors. Subject to the reserve requirements, financial institutions are required to maintain a certain amount of reserves at a central bank during a certain period. This creates a demand for reserve balances that is stable relative to a financial institutions' fluctuating daily demand for settlement balances. The liquidity gap between total supply and demand for reserve balances fluctuates along with autonomous factors including banknote and treasury fund variations. A central bank fills this liquidity gap through their market operations and guides a market interest rate, generally an overnight rate, to a level consistent with its policy interest rate. Standing facilities lend funds and receive deposits at predetermined rates in response to requests from financial institutions. This helps control interest rates through market operations by setting upper and lower bounds for the market rate, when it is highly variable, and by promoting the view to market participants that those facilities are always available.

Suggested Citation

  • Financial Markets Department, 2009. "Central Bank Responses to the Money Market Turmoil Stemming from Subprime Woes: Review of the Initial Phase from August 2007 until July 2008," Bank of Japan Research Papers 2009-03-27, Bank of Japan.
    • Handle: RePEc:boj:bojron:09-e-0327
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    References listed on IDEAS

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    1. Bank for International Settlements, 2008. "Central bank operations in response to the financial turmoil," CGFS Papers, Bank for International Settlements, number 31, december.
    2. Kei Imakubo & Takeshi Kimura & Teppei Nagano, 2008. "Cross-currency transmission of money market tensions," Bank of Japan Review Series 08-E-2, Bank of Japan.
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