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The effectiveness of unconventional monetary policy: the term auction facility

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  • Daniel L. Thornton

Abstract

This paper investigates the effectiveness of one of the Fed’s unconventional monetary policy tools, the term auction facility (TAF). At issue is whether the TAF reduced the spread between LIBOR rates and equivalent-term Treasury rates by reducing the liquidity premium embedded in LIBOR rates. This paper suggests that rather than reducing the liquidity premium in LIBOR rates, the announcement of the TAF increased the risk premium in financial and other bond rates because market participants interpreted the announcement by the Fed and other central banks as a sign that the financial crisis was worse than previously thought. Evidence is presented that supports this hypothesis.

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File URL: http://research.stlouisfed.org/wp/2010/2010-044.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-044.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-044

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Keywords: Liquidity (Economics) ; Monetary policy ; Financial risk management;

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Cited by:
  1. Urszula Szczerbowicz, 2011. "Are Unconventional Monetary Policies Effective?," Working Papers CELEG 1107, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  2. L. Gambacorta & B. Hofmann & G. Peersman, 2011. "The Effectiveness of Unconventional Monetary Policy at the Zero Lower Bound: A Cross-Country Analysis," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/765, Ghent University, Faculty of Economics and Business Administration.
  3. Stefano Puddu & Andreas Waelchli, 2011. "Too TAF Towards the Risk," IRENE Working Papers 11-01, IRENE Institute of Economic Research.
  4. Martina Cecioni & Giuseppe Ferrero & Alessandro Secchi, 2011. "Unconventional Monetary Policy in Theory and in Practice," Questioni di Economia e Finanza (Occasional Papers) 102, Bank of Italy, Economic Research and International Relations Area.

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