The Sub-Prime Crisis and UK Monetary Policy

Christopher Martin and Costas Milas

Department of Economics Working Papers from University of Bath, Department of Economics

Abstract: The “sub-prime” crisis, which led to major turbulence in global financial markets beginning in mid-2007, has posed major challenges for monetary policymakers. We analyse the impact on monetary policy of the widening differential between policy rates and the 3-month Libor rate, the benchmark for private sector interest rates. We show that the optimal monetary policy rule should include the determinants of this differential, adding an extra layer of complexity to the problems facing policymakers. Our estimates reveal significant effects of risk and liquidity measures, suggesting the widening differential between base rates and Libor was largely driven by a sharp increase in unsecured lending risk. We calculate that the crisis increased libor by up to 60 basis points; in response base rates fell further and quicker than would otherwise have happened as policymakers sought to offset some of the contractionary effects of the sub-prime crisis

Keywords: optimal monetary policy; sub-prime crisis (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2009

Downloads: (external link)
http://opus.bath.ac.uk/15977/1/0109.pdf

Related works:
Working Paper: The Sub-Prime Crisis and UK Monetary Policy (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eid:wpaper:15977

Access Statistics for this paper

More papers in Department of Economics Working Papers from University of Bath, Department of Economics
Contact information at EDIRC.
Series data maintained by Research Publications Librarian ().