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Federal Reserve policies and financial market conditions during the crisis

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  • Scott Brave
  • Hesna Genay
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    Abstract

    During the recent financial crisis, the Federal Reserve implemented a series of extraordinary and unconventional policies to alleviate the impact of the crisis on financial markets and the economy. In this paper, we examine the effects of these policies on broad financial market conditions, explicitly taking into account that policy was endogenously determined in response to prevailing financial market and economic conditions. We find that the Fed was more likely to initiate or expand new programs when financial market conditions were tighter than usual and economic conditions deteriorating. We also find that the Fed’s policies improved broad financial market conditions significantly at announcement and that the improvements were associated primarily with program initiations and expansions.

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    File URL: http://chicagofed.org/digital_assets/publications/working_papers/2011/wp2011_04.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-2011-04.

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    Date of creation: 2011
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    Handle: RePEc:fip:fedhwp:wp-2011-04

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    Keywords: Federal Reserve Act ; Financial crises - United States;

    This paper has been announced in the following NEP Reports:

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    1. Linda S. Goldberg & Craig Kennedy & Jason Miu, 2010. "Central bank dollar swap lines and overseas dollar funding costs," Staff Reports 429, Federal Reserve Bank of New York.
    2. Burcu Duygan-Bump & Patrick M. Parkinson & Eric S. Rosengren & Gustavo A. Suarez & Paul S. Willen, 2010. "How effective were the Federal Reserve emergency liquidity facilities?: evidence from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility," Risk and Policy Analysis Unit Working Paper QAU10-3, Federal Reserve Bank of Boston.
    3. Niall Coffey & Warren B. Hrung & Hoai-Luu Nguyen & Asani Sarkar, 2009. "The global financial crisis and offshore dollar markets," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Oct).
    4. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2010. "Large-scale asset purchases by the Federal Reserve: did they work?," Staff Reports 441, Federal Reserve Bank of New York.
    5. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
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    10. John B. Taylor & John C. Williams, 2009. "A black swan in the money market," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
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    14. Joshua Aizenman & Gurnain Kaur Pasricha, 2009. "Selective Swap Arrangements and the Global Financial Crisis: Analysis and Interpretation," NBER Working Papers 14821, National Bureau of Economic Research, Inc.
    15. Asani Sarkar & Jeffrey Shrader, 2010. "Financial amplification mechanisms and the Federal Reserve’s supply of liquidity during the crisis," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 55-74.
    16. 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.
    17. Olivier Armantier & Eric Ghysels & Asani Sarkar & Jeffrey Shrader, 2011. "Stigma in financial markets: evidence from liquidity auctions and discount window borrowing during the crisis," Staff Reports 483, Federal Reserve Bank of New York.
    18. Michael J. Fleming & Nicholas J. Klagge, 2010. "The Federal Reserve's foreign exchange swap lines," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 16(Apr).
    19. 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.
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