Effects of Central Bank Intervention on the Interbank Market during the Sub-Prime Crisis

36 Pages Posted: 2 Jul 2009  

Celso Brunetti

Board of Governors of the Federal Reserve System

Mario di Filippo

World Bank Group; World Bank Group

Jeffrey H. Harris

American University

Date Written: June 29, 2009

Abstract

Does central bank intervention improve liquidity in the interbank market during the current sub-prime crisis? To answer this question, we employ a unique dataset which reports trades and quotes of the e-MID, the only electronic, regulated interbank market in the world. Our results show that central bank intervention appears to create greater uncertainty rather than enhancing liquidity as intended. We find that central bank intervention crowds out private liquidity. These results suggest that, when counterparty risk poses systemic risk to the interbank market, the central bank should focus on providing interbank loan guarantees or engage in direct asset purchases rather than simply injecting capital into the system.

Keywords: Central Bank, Interbank Market, Interventions, Volatility

Suggested Citation

Brunetti, Celso and di Filippo, Mario and Harris, Jeffrey H., Effects of Central Bank Intervention on the Interbank Market during the Sub-Prime Crisis (June 29, 2009). Available at SSRN: https://ssrn.com/abstract=1428662 or http://dx.doi.org/10.2139/ssrn.1428662

Celso Brunetti (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Mario Di Filippo

World Bank Group

1818 H st NW
Washington, DC 20122
United States

World Bank Group

1818 H st NW
Washington, DC 20122
United States

Jeffrey H. Harris

American University ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-6669 (Phone)

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