The effectiveness of unconventional monetary policy: the term auction facility

Daniel Thornton

No 2010-044, Working Papers from Federal Reserve Bank of St. Louis

Abstract: This paper investigates the effectiveness of one of the Fed?s unconventional monetary policy tools, the term auction facility (TAF). At issue is whether the TAF reduced the spread between LIBOR rates and equivalent-term Treasury rates by reducing the liquidity premium embedded in LIBOR rates. This paper suggests that rather than reducing the liquidity premium in LIBOR rates, the announcement of the TAF increased the risk premium in financial and other bond rates because market participants interpreted the announcement by the Fed and other central banks as a sign that the financial crisis was worse than previously thought. Evidence is presented that supports this hypothesis.

Keywords: Liquidity (Economics); Monetary policy; Financial risk management (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba and nep-mon
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Journal Article: The effectiveness of unconventional monetary policy: the term auction facility (2011)
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DOI: 10.20955/wp.2010.044

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