The Effectiveness of Monetary Policy in Steering Money Market Rates during the Recent Financial Crisis

33 Pages Posted: 21 Apr 2011

See all articles by Puriya Abbassi

Puriya Abbassi

Johannes Gutenberg University Mainz - Faculty of Law and Economics

Tobias Linzert

European Central Bank (ECB); IZA Institute of Labor Economics

Date Written: April 4, 2011

Abstract

The recent financial crisis deeply affected the money market yield curve and thus, potentially, the proper functioning of the interest rate channel of monetary policy transmission. Therefore, we analyze the effectiveness of monetary policy in steering euro area moneymarket rates using two measures: first, the predictability of money market rates on the basis of monetary policy expectations, and second the impact of extraordinary central bank measures on money market rates. We find that market expectations about monetary policy are less relevant for money market rates up to 12 months after August 2007 compared to the pre-crisis period. At the same time, our results indicate that the ECB’s net increase in outstanding open market operations as of October 2008 accounts for at least a 100 basis point decline in Euribor rates. These findings show that central banks have effective tools at hand to conduct monetary policy in times of crises.

Keywords: Monetary transmission mechanism, Financial Crisis, Monetary policy implementation, European Central Bank, Money market

JEL Classification: E43, E52, E58

Suggested Citation

Abbassi, Puriya and Linzert, Tobias, The Effectiveness of Monetary Policy in Steering Money Market Rates during the Recent Financial Crisis (April 4, 2011). ECB Working Paper No. 1328, Available at SSRN: https://ssrn.com/abstract=1802352 or http://dx.doi.org/10.2139/ssrn.1802352

Puriya Abbassi (Contact Author)

Johannes Gutenberg University Mainz - Faculty of Law and Economics ( email )

Chair for Financial Economics
Jakob-Welder-Weg 4
D-55128 Mainz
Germany
+049 (0) 6131 39 24703 (Phone)
+049 (0) 6131 39 25588 (Fax)

HOME PAGE: http://www.financial-economics.vwl.uni-mainz.de

Tobias Linzert

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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