Do Central Bank Liquidity Facilities Affect Interbank Lending Rates?

Abstract

In response to the severe global credit market dislocations that started in August 2007, central banks around the world injected extraordinary amounts of liquidity into the financial system. Using an empirical arbitrage-free term structure model, we investigate the effectiveness of these actions in reducing dollar-denominated interbank lending rates. Our model accounts for fluctuations in the nominal U.S. Treasury yield curve and in the term structure of risk in financial corporate bond yields and term interbank lending rates. Our estimates suggest that central bank liquidity facilities did help lower term interbank lending rates.

Keywords: LIBOR, interbank market, liquidity, central bank

JEL Classification: G12, G18