The effectiveness of monetary policy in steering money market rates during the financial crisis
AbstractThe financial crisis has deeply affected money markets and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates looking at, first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that during the crisis money market rates up to 12 months still respond to revisions in the expected path of future rates, even though to a lesser extent than before August 2007. We attribute part of the loss in monetary policy effectiveness to money market rates being driven by higher liquidity premia and increased uncertainty about future interest rates. Our results also indicate that the ECB's non-standard monetary policy measures as of October 2008 were effective in addressing the disruptions in the euro area money market. In fact, our estimates suggest that non-standard monetary policy measures helped to lower Euribor rates by more than 80 basis points. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises. --
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Bibliographic InfoPaper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 14/2012.
Date of creation: 2012
Date of revision:
Monetary transmission mechanism; Non-standard monetary policy measures; European Central Bank; Interbank money market;
Find related papers by JEL classification:
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-29 (All new papers)
- NEP-CBA-2012-07-29 (Central Banking)
- NEP-EEC-2012-07-29 (European Economics)
- NEP-MAC-2012-07-29 (Macroeconomics)
- NEP-MON-2012-07-29 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boivin, Jean & Kiley, Michael T. & Mishkin, Frederic S., 2010.
"How Has the Monetary Transmission Mechanism Evolved Over Time?,"
Handbook of Monetary Economics,
in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 8, pages 369-422
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- Christopher Boortz & Stephanie Kremer & Simon Jurkatis & Dieter Nautz, 2014. "Information Risk, Market Stress and Institutional Herding in Financial Markets: New Evidence Through the Lens of a Simulated Model," SFB 649 Discussion Papers SFB649DP2014-029, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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