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How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis

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  • International Monetary Fund

Abstract

This paper examines the impact of macroeconomic and financial sector policy announcements in the United States, the United Kingdom, the euro area, and Japan during the recent crisis on interbank credit and liquidity risk premia. Announcements of interest rate cuts, liquidity support, liability guarantees, and recapitalization were associated with a reduction of interbank risk premia, albeit to a different degree during the subprime and global phases of the crisis. Decisions not to reduce interest rates and bail out individual banks in an ad hoc manner had adverse repercussions, both domestically and abroad. The results are robust to controlling for the surprise content of announcements and using alternative measures of financial distress.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/204.

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Length: 48
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/204

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Keywords: Liquidity; Banks; Data analysis; Databases; Financial sector; Spillovers; Statistics; bank bailouts; recapitalization; liquidity support; financial institutions; financial markets; financial system; bank failures; interbank market; deposit insurance; banking; money market; financial stability; financial economics; bank recapitalization; bond; financial market; money markets; bank of england; bank for international settlements; risk-free interest rate; international finance; bank holding; financial risk; bank policy; bank holding companies; bank of japan; bank balance sheets; banking systems; bonds; stock returns; stock market; money market fund; banking sector assets; bank interventions; bank intervention; subordinated debt; banking crises; bank borrowing; forward contract; bank securities; bank credit; bank stocks; earnings per share; financial volatility; stock price; bank bailout; financial intermediation; bond market; bank funding; bond issuance; bank restructuring; money market funds; bank guarantees; banking sector; equity market; bank management; bank debt; bond yield; systemic banking crises; moral hazard; segmentation; corporate bond; government bond; banks ? balance sheets; bankers; banking system; financial policies; credit union; banking crisis; bank distress; stock prices;

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References

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Citations

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Cited by:
  1. Gerlach, Petra, 2013. "Euro area CDS spreads in the crisis: The role of open market operations and contagion," Papers, Economic and Social Research Institute (ESRI) WP449, Economic and Social Research Institute (ESRI).
  2. Jonathan D. Ostry & Atish R. Ghosh & Marcos Chamon, 2012. "Dos objetivos, dos instrumentos: políticas monetaria y cambiaria en economías de mercados emergentes," Boletín, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 94-114, Abril-jun.
  3. Connor, Gregory & Flavin, Thomas & O’Kelly, Brian, 2012. "The U.S. and Irish credit crises: Their distinctive differences and common features," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(1), pages 60-79.
  4. Mauricio Calani & Kevin Cowan & Pablo García S., 2011. "Inflation Targeting in Financially Stable Economies: Has it Been Flexible Enough?," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 1, pages 283-368 Central Bank of Chile.
  5. Rose, Andrew K & Wieladek, Tomasz, 2011. "Financial Protectionism: the First Tests," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8404, C.E.P.R. Discussion Papers.
  6. Ivailo Arsov & Elie Canetti & Laura E. Kodres & Srobona Mitra, 2013. "Near-Coincident Indicators of Systemic Stress," IMF Working Papers 13/115, International Monetary Fund.
  7. Mark R. Stone & Etienne B. Yehoue & Kotaro Ishi, 2009. "Unconventional Central Bank Measures for Emerging Economies," IMF Working Papers 09/226, International Monetary Fund.
  8. Caitlin Ann Greatrex & Erick W. Rengifo, 2010. "Government Intervention and the CDS Market: A Look at the Market's Response to Policy Announcements During the 2007-2009 Financial Crisis," Fordham Economics Discussion Paper Series, Fordham University, Department of Economics dp2010-12, Fordham University, Department of Economics.
  9. Kotaro Ishi & Kenji Fujita & Mark R. Stone, 2011. "Should Unconventional Balance Sheet Policies Be Added to the Central Bank toolkit? a Review of the Experience so Far," IMF Working Papers 11/145, International Monetary Fund.
  10. Mark Carney, 2012. "Un marco de política monetaria para todas las estaciones," Boletín, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 69-77, Abril-jun.
  11. Brenda González-Hermosillo & Heiko Hesse, 2009. "Global Market Conditions and Systemic Risk," IMF Working Papers 09/230, International Monetary Fund.
  12. 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, Elsevier, vol. 31(8), pages 2038-2051.
  13. Ansgar Belke & Jens Klose, 2010. "(How) Do the ECB and the Fed React to Financial Market Uncertainty?: The Taylor Rule in Times of Crisis," Discussion Papers of DIW Berlin 972, DIW Berlin, German Institute for Economic Research.
  14. Carlos Carvalho & Stefano Eusepi & Christian Grisser, 2012. "Iniciativas de política durante la recesión global. ¿Cuáles eran las expectativas de los analistas?," Boletín, Centro de Estudios Monetarios Latinoamericanos, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 78-93, Abril-jun.
  15. Heiko Hesse & Nathaniel Frank, 2009. "The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis," IMF Working Papers 09/206, International Monetary Fund.

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