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Response of the Financial Markets to the European Central Bank’s Policy Announcements during the Subprime and Global Financial Crisis

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  • Ayoki, Milton

Abstract

This paper surveys evidence of the impact of macroeconomic and financial sector policy announcements in the euro area during the recent crisis on interbank credit and liquidity risk premia. Evidence suggests that interest rates cuts, fiscal stimulus and recapitalization measures were effective in calming the distressed financial markets as measured by reduction of the Libor–OIS spread. However, decisions not to reduce interest rates as well as ad hoc bank bailouts widened the Libor–OIS spread thus increased stress in the financial markets. Liquidity support announcements were initially effective, as measured by the reduction in the Libor-OIS spread, but lost significance as the crisis worsened. Both announcements of capital injections and guarantees on bank liabilities were effective in reducing credit risk in the euro area. The results of the event study further illustrate that the short-term impact of interventions depended on the particular circumstances that prevailed during each phase of the crisis.

Suggested Citation

  • Ayoki, Milton, 2010. "Response of the Financial Markets to the European Central Bank’s Policy Announcements during the Subprime and Global Financial Crisis," MPRA Paper 78846, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:78846
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    File URL: https://mpra.ub.uni-muenchen.de/78846/1/MPRA_paper_78846.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Financial Markets; European Central Bank; Policy Announcements; Subprime Crisis;
    All these keywords.

    JEL classification:

    • 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
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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