The recent financial crisis beginning in August 2007 depressed the world economies and disrupted the operation of conventional monetary policy instruments. Dramatic increases of three-month LIBOR rate in different currencies were observed and the spread between three-month LIBOR and OIS widened. These phenomena implied a broken transmission mechanism of monetary policy. The central banks of the UK and the US launched unconventional monetary policy tools i.e. liquidity provision and quantitative easing to stimulate domestic economies bypassing the banking systems. The European Central Bank implemented the Enhanced Credit Support scheme to provide liquidity to the banking system as well as fixing the monetary transmission mechanism. As a consequence, much research has been undertaken to study the impact of the unconventional monetary policies on economies. Most of the literature has studied the effect on long-term variables e.g. GDP, inflation and unemployment. But, our study here focuses on the impact of those policies on the credit and liquidity premia in the money market as represented by interest rate spreads. This aspect is important because the transmission of quantitative easing in the UK and the US to ultimate targets relies intermediately on reducing the cost of borrowing and interbank lending rates are the foundation for many market rates. In the EMU, to fix the monetary transmission mechanism, restoring the communication between EURIBOR and OIS is the primary step. Our results show that both credit and liquidity premia were the drivers of the widening LIBOR and OIS spreads. The quantitative easing in the UK and the US and Enhanced Credit Support in the EMU reduced credit risks and liquidity premia significantly, relying on the causality between the two premia, respectively.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:665333 |
| Date | January 2015 |
| Creators | Yao, W. |
| Publisher | University of the West of England, Bristol |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
| Source | http://eprints.uwe.ac.uk/26513/ |
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