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The U.S. Money Market and the Term Auction Facility in the Financial Crisis of 2007-–2009

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  • Tao Wu

    (International Monetary Fund)

Abstract

The interbank money market in the United States and Europe became turbulent during the financial crisis of 2007-–2009, with the counterparty default risk premiums and liquidity premiums of short-term financing among major financial institutions rising sharply to unprecedented levels. Using various measures of macroeconomic and financial risks, I find that the surges in counterparty risk premiums were predominantly driven by heightened uncertainties about the macroeconomy and financial market, as well as underlying mortgage default risks. The new liquidity facility that the Federal Reserve established, the Term Auction Facility, significantly relieved the strains in the money market, primarily through lowering banks' liquidity concerns. Its effect on the counterparty risk premiums, however, has been quite limited. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Tao Wu, 2011. "The U.S. Money Market and the Term Auction Facility in the Financial Crisis of 2007-–2009," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 617-631, May.
  • Handle: RePEc:tpr:restat:v:93:y:2011:i:2:p:617-631
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    Cited by:

    1. Duca, John V., 2013. "Did the commercial paper funding facility prevent a Great Depression style money market meltdown?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 747-758.
    2. Refet S. Gürkaynak & Jonathan H. Wright, 2013. "Identification and Inference Using Event Studies," Manchester School, University of Manchester, vol. 81, pages 48-65, September.
    3. Güntner, Jochen H.F., 2015. "The federal funds market, excess reserves, and unconventional monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 225-250.
    4. Guidolin, Massimo & Tam, Yu Man, 2013. "A yield spread perspective on the great financial crisis: Break-point test evidence," International Review of Financial Analysis, Elsevier, vol. 26(C), pages 18-39.
    5. Acharya, Viral V. & Fleming, Michael J. & Hrung, Warren B. & Sarkar, Asani, 2017. "Dealer financial conditions and lender-of-last-resort facilities," Journal of Financial Economics, Elsevier, vol. 123(1), pages 81-107.
    6. Rose, Andrew K. & Wieladek, Tomasz, 2012. "Too big to fail: Some empirical evidence on the causes and consequences of public banking interventions in the UK," Journal of International Money and Finance, Elsevier, vol. 31(8), pages 2038-2051.
    7. Kick, Thomas & Koetter, Michael & Storz, Manuela, 2016. "Cross-border transmission of emergency liquidity," Discussion Papers 34/2016, Deutsche Bundesbank.
    8. Irani, Rustom M. & Meisenzahl, Ralf R., 2015. "Loan Sales and Bank Liquidity Risk Management: Evidence from a U.S. Credit Register," Finance and Economics Discussion Series 2015-1, Board of Governors of the Federal Reserve System (U.S.).
    9. Abbassi, Puriya & Linzert, Tobias, 2012. "The effectiveness of monetary policy in steering money market rates during the financial crisis," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 945-954.
    10. repec:eee:jbfina:v:83:y:2017:i:c:p:193-220 is not listed on IDEAS
    11. repec:fip:fedgfe:2014-115 is not listed on IDEAS
    12. Carpenter, Seth & Demiralp, Selva & Eisenschmidt, Jens, 2014. "The effectiveness of non-standard monetary policy in addressing liquidity risk during the financial crisis: The experiences of the Federal Reserve and the European Central Bank," Journal of Economic Dynamics and Control, Elsevier, vol. 43(C), pages 107-129.
    13. Helwege, Jean & Boyson, Nicole M. & Jindra, Jan, 2017. "Thawing frozen capital markets and backdoor bailouts: Evidence from the Fed's liquidity programs," Journal of Banking & Finance, Elsevier, vol. 76(C), pages 92-119.
    14. repec:eee:quaeco:v:65:y:2017:i:c:p:128-136 is not listed on IDEAS
    15. Tamakoshi, Go & Hamori, Shigeyuki, 2014. "On cross-currency transmissions between US dollar and euro LIBOR-OIS spreads," Research in International Business and Finance, Elsevier, vol. 30(C), pages 83-90.

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