Credit risk dynamics in response to changes in the federal funds target: The implication for firm short-term debt
Kwamie Dunbar () and
Abu Amin ()
Review of Financial Economics, 2012, vol. 21, issue 3, 141-152
The recent credit crisis has raised a number of interesting questions regarding the role of the Federal Reserve Bank and the effectiveness of its expected and unexpected interventions in financial markets, especially during the crisis, given its mandate. This paper reviews and evaluates the impact of expected and unexpected changes in the federal funds rate target on credit risk premia. The paper's main innovation is the use of an ACH-VAR (autoregressive conditional hazard VAR) model to generate the Fed's expected and unexpected monetary policy shocks which are then used to determine the effects of a Federal Reserve policy change on counterparty credit risk and more importantly short-term firm debt financing. The findings answer a longstanding question sought by researchers on the effect of policy makers' announcements on firm debt financing. The results clearly show that the Federal Reserve influences short-term debt financing through the credit channel for both expansionary and contractionary monetary policies. In particular, we find that the growth in counterparty risk appears less responsive to anticipated responses in the Fed funds rate that fail to materialize than to an unanticipated increase in the federal funds rate. Finally, we also document that the results appear to validate the Feds interventions in financial markets to stem counterparty risk and to make liquidity more readily available to firms.
Keywords: Credit crisis; Federal funds rate; Autoregressive conditional hazard; Short term debt financing; Firm value (search for similar items in EconPapers)
JEL-codes: E32 E52 G10 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Journal Article: Credit risk dynamics in response to changes in the federal funds target: The implication for firm short‐term debt (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:revfin:v:21:y:2012:i:3:p:141-152
Access Statistics for this article
Review of Financial Economics is currently edited by T. K. Mukherjee and G. Whitney
More articles in Review of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().