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The Impact of Policy Initiatives on Credit Spreads during the 2007-09 Financial Crisis

  • Alan M. Rai

    (Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University)

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This paper assesses the impact of the various “unconventional” U.S. Federal Reserve policies and fiscal policies, introduced during the 2007–09 financial crisis period, on credit market spreads. I also examine the impact of the “conventional” monetary policy stance, defined as the difference between the effective federal funds rate and the rate implied by a Taylor rule. Examining policies initiated between July 2007 and January 2009, I find that fiscal policy announcements did not, in general, reduce market spreads. I also find that while the multitude of “unconventional” monetary policy initiatives were effective in reducing market spreads, the effects were relatively modest. Finally, increases in the Taylor-rule residual are associated with an increase in credit market spreads.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 9 (2013)
Issue (Month): 1 (March)
Pages: 45-104

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Handle: RePEc:ijc:ijcjou:y:2013:q:1:a:3
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  1. 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.
  2. Gorton, Gary B., 2010. "Slapped by the Invisible Hand: The Panic of 2007," OUP Catalogue, Oxford University Press, number 9780199734153, March.
  3. Gary Gorton & Andrew Metrick, 2009. "Securitized Banking and the Run on Repo," Yale School of Management Working Papers amz2358, Yale School of Management, revised 01 Sep 2009.
  4. Holmström, Bengt, 2011. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262015783, June.
  5. 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.
  6. Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
  7. Annastiina Silvennoinen & Timo Teräsvirta, 2008. "Multivariate GARCH models," CREATES Research Papers 2008-06, School of Economics and Management, University of Aarhus.
  8. Michael J. Fleming & Warren B. Hrung & Frank M. Keane, 2009. "The Term Securities Lending Facility: origin, design, and effects," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Feb).
  9. Joseph G. Haubrich & George Pennacchi & Peter Ritchken, 2011. "Inflation expectations, real rates, and risk premia: evidence from inflation swaps," Working Paper 1107, Federal Reserve Bank of Cleveland.
  10. Lawrence Christiano & Martin Eichenbaum & Sergio Rebelo, 2011. "When Is the Government Spending Multiplier Large?," Journal of Political Economy, University of Chicago Press, vol. 119(1), pages 78 - 121.
  11. Tobias Adrian & Christopher R. Burke & James J. McAndrews, 2009. "The Federal Reserve's Primary Dealer Credit Facility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Aug).
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