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The Term Auction Facility’s effectiveness in the financial crisis of 2007–09

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  • Tao Wu

Abstract

During the global financial crisis of 2007-2009, financial markets experienced tremendous strains, and the cost of short-term funding rose sharply. In response, several central banks around the world created new lending facilities to quickly provide liquidity to the banking sector and improve market functioning. The list includes the European Central Bank, Bank of England, Bank of Canada and Swiss National Bank. On Dec. 12, 2007, the Federal Reserve established its version?the term auction facility (TAF). ; Researchers have yet to reach a consensus on the effectiveness of such facilities. This Economic Letter, based on a recent study, provides an econometric evaluation of whether the TAF helped relieve strains in the U.S. money market. The findings reveal that the TAF has reduced liquidity risk premiums paid by banks; however, it has been less effective in cutting counterparty risk premiums.

Suggested Citation

  • Tao Wu, 2010. "The Term Auction Facility’s effectiveness in the financial crisis of 2007–09," Economic Letter, Federal Reserve Bank of Dallas, vol. 5(may).
  • Handle: RePEc:fip:feddel:y:2010:i:may:n:v.5no.4
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    File URL: http://www.dallasfed.org/assets/documents/research/eclett/2010/el1004.pdf
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    Cited by:

    1. Jacobson, Margaret M. & Tallman, Ellis W., 2015. "Liquidity provision during the crisis of 1914: Private and public sources," Journal of Financial Stability, Elsevier, vol. 17(C), pages 22-34.

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