The Impact of Policy Decisions on Global Liquidity During the Recent Financial Crisis

Abstract

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. Copyright © 2015 John Wiley & Sons, Ltd.

Outcomes for Implemented Macroeconomic Policy Responses and Multilateral Collaboration Strategies for Economic Recovery After a Crisis: A Rapid Scoping Review

“…Satiroglu et al 17 explored the covered interest rate parity (CIRP) condition to determine how the Federal Reserve and U.S. Treasury’s economic policies affected global liquidity at the time of the 2008 financial crisis. They reviewed federal swap lines intended for developed and emerging markets through bilateral currency arrangements with the intent to reduce stresses associated with dollar funding abroad.…”

“…Satiroglu et al 17 also evaluated the extension of currency swap lines to international central banks in both developed and emerging markets through bilateral currency arrangements to alleviate dollar funding stresses internationally. Through swap lines, banks in need of U.S. dollars received discount window funding that significantly reduced CIRP deviations, but only for short-term maturities.…”