On the effectiveness of the Federal Reserve's new liquidity facilities

This paper examines the effectiveness of the new liquidity facilities that the Federal Reserve established in response to the recent financial crisis. I develop a no-arbitrage based affine term structure model with default risk and conduct a thorough factor analysis of the counterparty default risk among major financial institutions and the underlying mortgage default risk. The new facilities' effectiveness is examined, by first separately examining their effects in relieving financial institutions' liquidity concerns and reducing the counterparty risk premiums, and then quantifying their overall effects in reducing financial strains in the inter-bank money market. ; Empirical results indicate that the Term Auction Facility (TAF) has a strong effect in reducing financial strains in the inter-bank money market, primarily through relieving financial institutions' liquidity concerns. Heightened uncertainty regarding the macroeconomy, financial markets, and mortgage default risk have significantly raised counterparty risk premiums among financial institutions, but have had little effect on their liquidity premiums. The Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), however, are found to have had less discernible effects so far in relieving financial strains in the Libor market. This is consistent with market observations of a weaker interest from primary dealers in participating in the TSLF auctions than banks have shown in tapping the TAF.Liquidity (Economics) ; Monetary policy - United States ; Money market ; Financial markets ; Interbank market

The Term Auction Facility’s effectiveness in the financial crisis of 2007–09

During the global financial crisis of 2007-2009, financial markets experienced tremendous strains, and the cost of short-term funding rose sharply. In response, several central banks around the world created new lending facilities to quickly provide liquidity to the banking sector and improve market functioning. The list includes the European Central Bank, Bank of England, Bank of Canada and Swiss National Bank. On Dec. 12, 2007, the Federal Reserve established its version?the term auction facility (TAF). ; Researchers have yet to reach a consensus on the effectiveness of such facilities. This Economic Letter, based on a recent study, provides an econometric evaluation of whether the TAF helped relieve strains in the U.S. money market. The findings reveal that the TAF has reduced liquidity risk premiums paid by banks; however, it has been less effective in cutting counterparty risk premiums.Global financial crisis ; Liquidity (Economics) ; Financial markets ; Interbank market

Globalization’s effect on interest rates and the yield curve

Globalization’s impact on the relationship between short- and long-term interest rates poses potentially formidable challenges for central banks around the world. It underscores the importance of formulating monetary policy in a credible, consistent and forward-looking way and better communicating it to the public. Adopting these virtues will help anchor long-run inflationary expectations and decrease associated risk premiums. It will also help the public better understand central banks’ behavior and decrease the perceived uncertainty of future monetary policy. Globalization may also call for greater cooperation and coordination of policy worldwide because international financial conditions increasingly affect the price of credit in all major countries.Interest rates ; Monetary policy ; Globalization

Accounting for the bond-yield conundrum

Long-term interest rates tend to rise as monetary policymakers increase short-term interest rates. This relationship didn't hold, however, during the recent U.S. monetary policy tightening cycle. Between June 2004 and June 2006, the Federal Open Market Committee increased the federal funds rate 17 times - going from 1 percent to 5.25 percent. Yet, long-term interest rates declined or stayed flat until early 2006. ; This divergence between short- and long-term interest rates caught many economists, investors and central bankers by surprise. In his Feb. 16, 2005, congressional testimony, former Federal Reserve Chairman Alan Greenspan characterized the behavior of long-term interest rates since June 2004: "For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience." ; Since then, this conundrum has prompted a great deal of discussion regarding both its magnitude and the factors behind it. However, a compelling and broadly accepted explanation has yet to be reached. ; The correct understanding and quantification of the conundrum have direct implications for monetary policy, which largely impacts economies as long-term interest rates respond to changes in central banks' target rates. Persistent changes in the relationship between short- and long-term interest rates will affect the timing and impact of monetary policy actions.Monetary policy - United States ; Federal funds rate ; Federal Open Market Committee ; Bond market

The longitudinal and transverse distributions of the pion wavefunction from the present experimental data on the pion-photon transition form factor

It is noted that the low-energy behavior of the pion-photon transition form factor $F_{\pi\gamma}(Q^2)$ is sensitive to the transverse distribution of the pion wavefunction, and its high-energy behavior is sensitive to the longitudinal one. Thus a careful study on $F_{\pi\gamma}(Q^2)$ can provide helpful information on the pion wavefunction precisely. In this paper, we present a combined analysis of the data on $F_{\pi\gamma}(Q^2)$ reported by the CELLO, the CLEO, the BABAR and the BELLE collaborations. It is performed by using the method of least squares. By using the combined measurements of BELLE and CLEO Collaborations, the pion wavefunction longitudinal and transverse behavior can be fixed to a certain degree, i.e. we obtain $\beta \in [0.691,0.757] \rm GeV$ and $B \in [0.00,0.235]$ for $P_{\chi^2} \geq 90\%$, where $\beta$ and $B$ are two parameters of a convenient pion wavefunction model whose distribution amplitude can mimic the various longitudinal behavior under proper choice of parameters. We observe that the CELLO, CLEO and BELLE data are consistent with each other, all of which prefers the asymptotic-like distribution amplitude; while the BABAR data prefers a more broad distribution amplitude, such as the CZ-like one.Comment: 7 pages, 10 figure