EconStor >
Federal Reserve Bank of New York >
Staff Reports, Federal Reserve Bank of New York >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/60867
  
Title:Financial amplification mechanisms and the Federal Reserve's supply of liquidity during the crisis PDF Logo
Authors:Sarkar, Asani
Shrader, Jeffrey
Issue Date:2010
Series/Report no.:Staff Report, Federal Reserve Bank of New York 431
Abstract:The small decline in the value of mortgage-related assets relative to the large total losses associated with the financial crisis suggests the presence of financial amplification mechanisms, which allow relatively small shocks to propagate through the financial system. We review the literature on financial amplification mechanisms and discuss the Federal Reserve's interventions during different stages of the crisis in terms of this literature. We interpret the Fed's early-stage liquidity programs as working to dampen balance sheet amplifications arising from the positive feedback between financial and asset prices. By comparison, the Fed's later-stage crisis programs take into account adverse-selection amplifications that operate via increases in credit risk and the externality imposed by risky borrowers on safe ones. Finally, we provide new empirical evidence that increases in the amount outstanding of funds supplied by the Fed reduce the Libor-OIS spread during periods of high liquidity risk. In contrast, reductions in the Fed's liquidity supply in 2009 did not increase the spread. Our analysis has implications for the impact on asset prices of a potential withdrawal of liquidity supply by the Fed.
Subjects:Financial amplification mechanism
Federal Reserve liquidity facilities
credit risk
liquidity risk
Libor-OIS spread
JEL:G01
G18
G21
G32
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

Files in This Item:
File Description SizeFormat
622938770.pdf580.8 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/60867

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.