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The effectiveness of monetary policy in steering money market rates during the financial crisis

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  • Abbassi, Puriya
  • Linzert, Tobias

Abstract

The financial crisis has deeply affected money markets and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area money market rates looking at, first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that during the crisis money market rates up to 12 months still respond to revisions in the expected path of future rates, even though to a lesser extent than before August 2007. We attribute part of the loss in monetary policy effectiveness to money market rates being driven by higher liquidity premia and increased uncertainty about future interest rates. Our results also indicate that the ECB's non-standard monetary policy measures as of October 2008 were effective in addressing the disruptions in the euro area money market. In fact, our estimates suggest that non-standard monetary policy measures helped to lower Euribor rates by more than 80 basis points. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.

Suggested Citation

  • Abbassi, Puriya & Linzert, Tobias, 2012. "The effectiveness of monetary policy in steering money market rates during the financial crisis," Discussion Papers 14/2012, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:142012
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    Cited by:

    1. Pennings, Steven & Ramayandi, Arief & Tang, Hsiao Chink, 2015. "The impact of monetary policy on financial markets in small open economies: More or less effective during the global financial crisis?," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 60-70.
    2. repec:nbp:nbpbik:v:47:y:2016:i:1:p:61-90 is not listed on IDEAS
    3. Christopher Boortz & Simon Jurkatis & Stephanie Kremer & Dieter Nautz, 2013. "Herding in financial markets: Bridging the gap between theory and evidence," SFB 649 Discussion Papers SFB649DP2013-036, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    4. repec:kap:iecepo:v:15:y:2018:i:2:d:10.1007_s10368-017-0401-7 is not listed on IDEAS
    5. von Borstel, Julia & Eickmeier, Sandra & Krippner, Leo, 2016. "The interest rate pass-through in the euro area during the sovereign debt crisis," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 386-402.
    6. Dubecq, Simon & Monfort, Alain & Renne, Jean-Paul & Roussellet, Guillaume, 2016. "Credit and liquidity in interbank rates: A quadratic approach," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 29-46.
    7. repec:eee:ecmode:v:70:y:2018:i:c:p:288-300 is not listed on IDEAS
    8. Hernandis, Lucía & Torró, Hipòlit, 2013. "The information content of Eonia swap rates before and during the financial crisis," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5316-5328.
    9. Mariusz Kapuściński & Ewa Stanisławska, 2016. "Interest rate pass-through in Poland since the global financial crisis," NBP Working Papers 247, Narodowy Bank Polski, Economic Research Department.
    10. McQuade, Peter & Falagiarda, Matteo & Tirpák, Marcel, 2015. "Spillovers from the ECB's non-standard monetary policies on non-euro area EU countries: evidence from an event-study analysis," Working Paper Series 1869, European Central Bank.
    11. Darracq Pariès, Matthieu & Maurin, Laurent & Moccero, Diego, 2014. "Financial conditions index and credit supply shocks for the euro area," Working Paper Series 1644, European Central Bank.
    12. Christopher Boortz & Simon Jurkatis & Stephanie Kremer & Dieter Nautz, 2013. "Institutional Herding in Financial Markets: New Evidence through the Lens of a Simulated Model," Discussion Papers of DIW Berlin 1336, DIW Berlin, German Institute for Economic Research.
    13. Cifarelli, Giulio & Paladino, Giovanna, 2016. "Time-varying mark-up and the ECB monetary policy transmission in a highly non linear framework," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 247-262.
    14. repec:bla:sajeco:v:85:y:2017:i:3:p:455-478 is not listed on IDEAS
    15. repec:eee:ecmode:v:67:y:2017:i:c:p:10-22 is not listed on IDEAS
    16. Burriel, Pablo & Galesi, Alessandro, 2018. "Uncovering the heterogeneous effects of ECB unconventional monetary policies across euro area countries," European Economic Review, Elsevier, vol. 101(C), pages 210-229.
    17. Christopher Boortz & Stephanie Kremer & Simon Jurkatis & Dieter Nautz, 2014. "Information Risk, Market Stress and Institutional Herding in Financial Markets: New Evidence Through the Lens of a Simulated Model," SFB 649 Discussion Papers SFB649DP2014-029, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    18. Lewis, Vivien & Roth, Markus, 2017. "The financial market effects of the ECB's asset purchase programs," Discussion Papers 23/2017, Deutsche Bundesbank.
    19. Rubio, Margarita, 2016. "Short and long-term interest rates and the effectiveness of monetary and macroprudential policies," Journal of Macroeconomics, Elsevier, vol. 47(PA), pages 103-115.
    20. Hlebik Sviatlana & Verga Giovanni, 2015. "The European Central Bank Quantitative Policy and Its Consistency with the Demand for Liquidity," Scientific Annals of Economics and Business, De Gruyter Open, vol. 62(3), pages 425-451, November.
    21. repec:rjr:romjef:v::y:2017:i:4:p:22-46 is not listed on IDEAS
    22. C. Emre Alper & R. Armando Morales & Fan Yang, 2017. "Monetary Policy Implementation and Volatility Transmission Along the Yield Curve: The Case of Kenya," South African Journal of Economics, Economic Society of South Africa, vol. 85(3), pages 455-478, September.

    More about this item

    Keywords

    Monetary transmission mechanism; Non-standard monetary policy measures; European Central Bank; Interbank money market;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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

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