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A black swan in the money market

  • John B. Taylor
  • John C. Williams

The recent financial crisis saw a dramatic and persistent jump in interest rate spreads between overnight federal funds and longer-term interbank loans. The Fed took several actions to reduce these spreads, including the creation of the Term Auction Facility (TAF). The effectiveness of these policies depends on the cause of the increased spreads—whether counterparty risk, liquidity, or other factors. Using a no-arbitrage pricing framework and various measures of risk, we find robust evidence that increased a counterparty risk contributed to the rise in spreads, but do not find robust evidence that the TAF had a significant effect on spreads.

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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2009)
Issue (Month): Jan ()

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Handle: RePEc:fip:fedfpr:y:2009:i:jan:x:2
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  1. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
  2. Joe Peek & Eric S. Rosengren, 1998. "Determinants of the Japan premium: actions speak louder than words," Working Papers 98-9, Federal Reserve Bank of Boston.
  3. Vasco Cúrdia & Michael Woodford, 2009. "Credit frictions and optimal monetary policy," BIS Working Papers 278, Bank for International Settlements.
  4. Anderson, Richard G & Rasche, Robert H, 1982. "What Do Money Market Models Tell Us about How to Implement Monetary Policy?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(4), pages 796-828, November.
  5. Covrig, Vicentiu & Low, Buen Sin & Melvin, Michael, 2004. "A Yen is Not a Yen: TIBOR/LIBOR and the Determinants of the Japan Premium," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(01), pages 193-208, March.
  6. repec:clu:wpaper:0809-02 is not listed on IDEAS
  7. John P. Judd & John L. Scadding, 1982. "What do money market models tell us about how to implement monetary policy: reply," Working Papers in Applied Economic Theory 108, Federal Reserve Bank of San Francisco.
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  1. A Black Swan in the Money Market (AEJ:MA 2009) in ReplicationWiki

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