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American Economic Journal: Macroeconomics: Vol. 1 No. 1 (January 2009)

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A Black Swan in the Money Market

Article Citation

Taylor, John B., and John C. Williams. 2009. "A Black Swan in the Money Market." American Economic Journal: Macroeconomics, 1(1): 58-83.

DOI: 10.1257/mac.1.1.58

Abstract

The recent financial crisis saw a dramatic and persistent jump in interest rate spreads between overnight federal funds and longer - term interbank loans. The Fed took several actions to reduce these spreads including the creation of the Term Auction Facility (TAF). The effectiveness of these policies depends on the cause of the increased spreads such as counterparty risk, liquidity, or other factors. Using a no-arbitrage pricing framework and various measures of risk, we find robust evidence that increased counterparty risk contributed to the rise in spreads but do not find robust evidence that the TAF had a significant effect on spreads. (JEL E43, E44, E52, G21)

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Authors

Taylor, John B. (Stanford U)
Williams, John C. (Federal Reserve Bank of San Francisco)

JEL Classifications

E43: Determination of Interest Rates; Term Structure of Interest Rates
E44: Financial Markets and the Macroeconomy
E52: Monetary Policy
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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American Economic Journal: Macroeconomics


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