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)
Taylor, John B., and John C. Williams.
"A Black Swan in the Money Market."
American Economic Journal: Macroeconomics,
Determination of Interest Rates; Term Structure of Interest Rates
Financial Markets and the Macroeconomy
Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages