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

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  • Alan M. Rai

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

Abstract

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.

Suggested Citation

  • 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.
    • Handle: RePEc:ijc:ijcjou:y:2013:q:1:a:3
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    Cited by:

    1. Thomas B. King & Kurt F. Lewis, 2020. "Credit Risk, Liquidity, and Lies," International Journal of Central Banking, International Journal of Central Banking, vol. 16(5), pages 219-267, October.
    2. Kim, Kyungmin & Lee, Joo Yong, 2017. "Estimating the effects of FX-related macroprudential policies in Korea," International Review of Economics & Finance, Elsevier, vol. 50(C), pages 23-48.
    3. Gomez-Ruano, Gerardo, 2014. "Should Central Banks Take On Credit-Risk?," MPRA Paper 93633, University Library of Munich, Germany.
    4. Johannes W. Fedderke, 2021. "The South African–United States sovereign bond spread and its association with macroeconomic fundamentals," South African Journal of Economics, Economic Society of South Africa, vol. 89(4), pages 499-525, December.

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    More about this item

    JEL classification:

    • 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
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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