Degree Year


Document Type


Degree Name

Bachelor of Arts




Ellis Tallman
Ed McKelvey


In the summer of 2007, stress in money markets created concern among economic policymakers. Fears of counter-party risk and concerns regarding the quality of bank collateral caused tremendous funding pressures for commercial and investment banks, which relied heavily on short-term borrowing. Initial attempts by the Federal Reserve to provide liquidity to banks and to alleviate strains in money markets through conventional monetary policy channels proved ineffective. After a sustained period of financial stress, the Federal Reserve introduced several programs in late 2007 and in early 2008 to address the liquidity needs of market participants. These programs were geared toward addressing the shortcomings of the Fed's existing monetary tools and toward providing emergency liquidity to banks facing funding pressures. In this paper, I analyze the effectiveness of several of these facilities, including the Term Auction Facility (TAF), the Primary Dealer Credit Facility (PDCF), the Term Securities Lending Facility (TSLF), and foreign exchange swap lines. To assess the impact of these facilities, I estimate their effectiveness in lowering spreads of the 1-month and 3-month London Inter-Bank Offered Rate (LIBOR) over the Overnight Index Swap (OIS) rates of the same maturities. I develop a reduced form model of LIBOR-OIS spreads from August 2007 to September 2008, guided by an analysis of the financial environment during that period. By creating variables related to the size, in dollars, of various Federal Reserve facilities, I am able to estimate the separate effects of each facility on inter-bank borrowing rates. My analysis also estimates the effects of announcements, auctions, and settlements related to a particular facility. Empirical findings indicate that the TAF lowered LIBOR-OIS spreads during the early part of the sample period, becoming less effective toward the end of the period as financial pressures became more concentrated among investment banks and non-bank institutions. Results also indicate that the PDCF, TSLF, and swap lines were less effective at reducing borrowing rates during this period.

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