Central Bank Response to the 2007–08 Financial Market Turbulence: Experiences and Lessons Drawn
September 1, 2008
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Summary
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.
Subject: Banking, Collateral, Liquidity, Open market operations, Standing facilities
Keywords: balance sheet, financial market, liquidity management, monetary policy, money market, overnight rate, U.S. dollar, WP
Pages:
52
Volume:
2008
DOI:
Issue:
210
Series:
Working Paper No. 2008/210
Stock No:
WPIEA2008210
ISBN:
9781451870688
ISSN:
1018-5941
