March 2013 issue contents
The Impact of Policy Initiatives on Credit Spreads during the 2007-09 Financial Crisis

by Alan M. Rai
Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University


This paper assesses the impact of the various "unconventional" U.S. Federal Reserve policies and fiscal policies, introduced during the 2007-09 financial crisis period, on credit market spreads. I also examine the impact of the "conventional" monetary policy stance, defined as the difference between the effective federal funds rate and the rate implied by a Taylor rule. Examining policies initiated between July 2007 and January 2009, I find that fiscal policy announcements did not, in general, reduce market spreads. I also find that while the multitude of "unconventional" monetary policy initiatives were effective in reducing market spreads, the effects were relatively modest. Finally, increases in the Taylor-rule residual are associated with an increase in credit market spreads.

JEL Codes: E52, E58, E63, G12, G14.

Full article (PDF, 60 pages 2000 kb)

Discussion by Jialin Yu