Central Bank Response to the 2007–08 Financial Market Turbulence: Experiences and Lessons Drawn
IMF Working Papers, September 1, 2008
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- Central Bank Response to the 2007–08 Financial Market Turbulence: Experiences and Lessons Drawn
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Bibliographic details
- Authors: Peter Stella, Seiichi Shimizu, Simon T Gray, Ulrich H Klueh, Alexandre Chailloux
- Published: September 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451870688.001
Summary
- The paper reviews the policy response of major central banks during the 2007–08 financial market turbulence.
- It suggests scope for convergence among central bank operational frameworks through adopting elements that proved most instrumental in calming markets.
- Emphasizes that flexible use of open market operations was needed to avoid the stigma associated with traditional standing facilities and to maintain at least basic market functioning.
- Notes that a flexible framework requires careful consideration of the desirable limits to market intervention.
Key findings
- Rapid liquidity provision to a broad range of counterparties was instrumental in calming markets.
- Collateral policies that were congruent with market developments helped restore market functioning.
- An ability to increase the average maturity of liquidity provision was important during the turbulence.
- Central bank cooperation to facilitate the use of cross-border collateral supported market stabilization.
- Flexible open market operations avoided stigma of traditional standing facilities and allowed central banks to maintain core market operations.
Policy recommendations and operational lessons
- Adopt rapid liquidity provision mechanisms that reach a broad range of counterparties.
- Align collateral policies with ongoing market developments to ensure effective acceptance and use of collateral.
- Build capacity to extend the average maturity of liquidity provision when market conditions warrant longer-term support.
- Enhance cross-border central bank cooperation to facilitate the use of cross-border collateral and reduce frictions.
- Use open market operations flexibly to avoid stigma and preserve market functioning, while defining clear limits to market intervention to manage risks associated with flexibility.
Content in this bundle
- Executive Summary — _wp08210