Central Bank Response to the 2007-08 Financial Market Turbulence

Abstract

The paper reviews the policy response of major central banks during the 2007–08 financial market turbulence and suggests that there is scope for convergence among central bank operational frameworks through the adoption of those elements that proved most instrumental in calming markets. These include (i) rapid liquidity provision to a broad range of counterparties; (ii) a congruence of collateral policies with market developments; (iii) an ability to increase the average maturity of liquidity provision; and (iv) central bank cooperation to facilitate the use of cross-border collateral. Flexible use of open market operations was needed to avoid the stigma associated with traditional standing facilities, and allowed central banks to maintain at least basic market functioning. Having a flexible framework, however, requires careful consideration of the desirable limits to market intervention.Monetary operations;Liquidity management;International cooperation;Financial risk;collateral, central bank, credit, monetary policy, pricing, money market, counterparty, repo, inflation, money markets, prices, refinancing, open market operations, national bank, pools, monetary fund, payments, government securities, payment system, discount rate, reserve requirements, purchases, monetary stance, payment systems, transmission of monetary policy, reserve requirement, holdings of government securities, cross border transactions, ccbm, systemic risk, government security, monetary base, monetary policy operations, monetary policy operation