The Impact of Policy Decisions on Global Liquidity During the Recent Financial Crisis
22 Pages Posted: 10 Feb 2015
Date Written: July 2, 2013
The collapse of the recent housing price bubble precipitated the 2007-2008 financial crisis and caused international funding liquidity to dry up. We investigate how economic policies undertaken by the Federal Reserve and U.S. Treasury around the crisis impacted global liquidity by examining the covered interest rate parity (CIRP) condition. We find that swap lines orchestrated by the Fed, stress test announcements, asset purchase programs, and other economic policy and news events significantly impacted CIRP violations. Our findings indicate that policies undertaken during the crisis helped relieve market frictions in foreign exchange markets and that the impact of these policies differed for developed and emerging markets.
Keywords: Covered Interest Rate Parity, Economic Policy, Financial Crisis, Currency Liquidity, Foreign Exchange Rates
JEL Classification: G01, G12
Suggested Citation: Suggested Citation