The Federal Reserve and the 2007-2009 financial crisis: Treating a virus with antibiotics? Evidence from the commercial paper market

Mark D. Griffiths, Vladimir Kotomin, Drew B. Winters

Research output: Contribution to journalArticle

11 Scopus citations

Abstract

The two main explanations for the crisis in the commercial paper (CP) market are credit concerns and liquidity issues. The CP market is not homogeneous in terms of credit quality, maturities and types of issues. We find that lower credit-quality CP suffered more during the crisis. Additionally, we find little evidence that Federal Reserve (Fed) liquidity facilities reduced the impact of the crisis, but that when the Fed became a lender in the CP market, the crisis pressures were dramatically reduced. We conclude that the crisis in the money markets is related more to increases in credit risk. Liquidity is a secondary issue.

Original languageEnglish
Pages (from-to)541-567
Number of pages27
JournalFinancial Review
Volume46
Issue number4
DOIs
StatePublished - Nov 2011

Keywords

  • Commercial paper
  • Credit risk
  • Financial crisis
  • Liquidity risk

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