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The Federal Reserve and the 2007–2009 Financial Crisis: Treating a Virus with Antibiotics? Evidence from the Commercial Paper Market
Author(s) -
Griffiths Mark D.,
Kotomin Vladimir,
Winters Drew B.
Publication year - 2011
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2011.00311.x
Subject(s) - market liquidity , financial crisis , financial system , liquidity crisis , homogeneous , business , money market , monetary economics , economics , finance , interest rate , macroeconomics , physics , thermodynamics
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.