Crisis Management in Canada: Analyzing Default Risk and Liquidity Demand during Financial Stress
- American Economic Journal: Microeconomics (Forthcoming)
Using detailed information from the Canadian interbank payments
system and from liquidity-providing facilities, we find that despite
sustained increases in market-rate spreads, the increase in banks'
willingness-to-pay for liquidity during the 2008/2009 financial crisis was short-lived. Our study suggests that high-frequency distress
indicators based on demand for liquidity offered by central banks
can be complementary, and perhaps even superior, to market-based
indicators, especially during times and in markets where uncertainty in the economic environment may lead to lack of meaningful
information in prices due to absence of trading.
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