Monetary Policy Shocks and Risk Premia in the Interbank Market

TY - JOUR

T1 - Monetary Policy Shocks and Risk Premia in the Interbank Market

AU - Wingender, Asger Moll

PY - 2011

Y1 - 2011

N2 - Unexpected changes in the federal funds rate are shown to have significant effects on risk premia in the money market. The spread between interbank lending rates and U.S. Treasury bills tends to narrow when the FOMC decides to cut interest rates by more than the expectation implied by federal funds futures. However, rate cuts taking place at unscheduled FOMC meetings can increase risk premia during periods of financial distress, consistent with the view that central bank actions under such circumstances are perceived as signals that policy makers have private information of further unfavorable developments in financial markets.

AB - Unexpected changes in the federal funds rate are shown to have significant effects on risk premia in the money market. The spread between interbank lending rates and U.S. Treasury bills tends to narrow when the FOMC decides to cut interest rates by more than the expectation implied by federal funds futures. However, rate cuts taking place at unscheduled FOMC meetings can increase risk premia during periods of financial distress, consistent with the view that central bank actions under such circumstances are perceived as signals that policy makers have private information of further unfavorable developments in financial markets.

U2 - 10.2202/1935-1690.2147

DO - 10.2202/1935-1690.2147

M3 - Journal article

SN - 1555-0486

VL - 11

JO - The B.E. Journals in Macroeconomics

JF - The B.E. Journals in Macroeconomics

IS - 1, Article 4

ER -