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The Effectiveness of Central Bank Interventions During the First Phase of the Subprime Crisis

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Author Info

  • Heiko Hesse
  • Nathaniel Frank

Abstract

This paper provides evidence that central bank interventions had a statistically significant impact on easing stress in unsecured interbank markets during the first phase of the subprime crisis which began in July 2007. Extraordinary liquidity provisions, such as the Term Auction Facility by the Federal Reserve, are analyzed. First a decomposition of the Libor-OIS spread indicates that credit premia increased in importance as the crisis deepened. Second, using Markov switching models, central bank operations are then graphically associated with reductions in term funding stress. Finally, bivariate VAR and GARCH models are adopted to econometrically quantified these impacts. While helpful in compressing Libor spreads, the economic magnitudes of central interventions have overall not been very large.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/206.

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Length: 28
Date of creation: 01 Sep 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/206

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Related research

Keywords: Bank credit; Banking sector; Central bank policy; Credit risk; Economic models; Liquidity management; Risk management; money markets; central bank; money market; discount rates; interbank money markets; financial institutions; monetary policy; monetary fund; reserve requirements; national bank; discount rate; financial markets; financial stability; open market operations; derivative; financial system; derivative contracts; money market funds; hedge; financial instruments; deposit insurance; hedge funds; monetary policy implications; moral hazard; discounting; government securities;

This paper has been announced in the following NEP Reports:

References

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  1. John C. Williams & John B. Taylor, 2009. "A Black Swan in the Money Market," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 58-83, January.
  2. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis," IMF Working Papers 09/204, International Monetary Fund.
  3. François-Louis Michaud & Christian Upper, 2008. "What drives interbank rates? Evidence from the Libor panel," BIS Quarterly Review, Bank for International Settlements, March.
  4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  5. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  6. Heiko Hesse & Nathaniel Frank & Brenda González-Hermosillo, 2008. "Transmission of Liquidity Shocks," IMF Working Papers 08/200, International Monetary Fund.
  7. Yacine Aït-Sahalia & Jochen Andritzky & Andreas Jobst & Sylwia Nowak & Natalia Tamirisa, 2010. "Market Response to Policy Initiatives during the Global Financial Crisis," NBER Working Papers 15809, National Bureau of Economic Research, Inc.
  8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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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 WP449, Economic and Social Research Institute (ESRI).
  2. Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2013. "The effectiveness of the non-standard policy measures during the financial crises: the experiences of the federal reserve and the European Central Bank," Working Paper Series 1562, European Central Bank.
  3. Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2014. "The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 107-129.
  4. Mark Carney, 2012. "Un marco de política monetaria para todas las estaciones," Boletín, Centro de Estudios Monetarios Latinoamericanos, vol. 0(2), pages 69-77, Abril-jun.
  5. Claudio Morana, 2013. "Factor Vector Autoregressive Estimation of Heteroskedastic Persistent and Non Persistent Processes Subject to Structural Breaks: New Insights on the US OIS SPreads Term Structure," Working Papers 233, University of Milano-Bicocca, Department of Economics, revised Feb 2013.
  6. Alan M. Rai, 2013. "The Impact of Policy Initiatives on Credit Spreads during the 2007-09 Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 9(1), pages 45-104, March.
  7. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis," IMF Working Papers 09/204, International Monetary Fund.
  8. Christiaan Pattipeilohy & Jan Willem van den End & Mostafa Tabbae & Jon Frost & Jakob de Haan, 2013. "Unconventional monetary policy of the ECB during the financial crisis: An assessment and new evidence," DNB Working Papers 381, Netherlands Central Bank, Research Department.
  9. 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, vol. 0(2), pages 94-114, Abril-jun.
  10. 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, vol. 0(2), pages 78-93, Abril-jun.

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