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On the Effectiveness of the Monetary Policy During the Financial Crisis of 2007

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On the Effectiveness of the Monetary Policy During the Financial Crisis of 2007 UNIVERSITY OF GHENT FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION Academic year 2010 – 2011 On the effectiveness of the monetary policy during the financial crisis of 2007 Federal Reserve vs. European Central Bank Master thesis presented to obtain the degree of Master in Applied Economics: Business Engineering Alexander Naessens & Sabien Windels under the leadership of Prof. dr. Gert Peersman Selien De Schryder UNIVERSITY OF GHENT FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION Academic year 2010 – 2011 On the effectiveness of the monetary policy during the financial crisis of 2007 Federal Reserve vs. European Central Bank Master thesis presented to obtain the degree of Master in Applied Economics: Business Engineering Alexander Naessens & Sabien Windels under the leadership of Prof. dr. Gert Peersman Selien De Schryder Ondergetekenden verklaren dat de inhoud van deze masterproef mag geraadpleegd en/of gereproduceerd worden, mits bronvermelding. We hereby declare that the content of this thesis may be consulted, and/or reproduced on condition that the source is quoted. Alexander Naessens Sabien Windels “As long as the music is playing, you’ve got to get up and dance. We’re still dancing” Charles Prince, former CEO of Citigroup Financial Times, July 2007 ACKNOWLEDGEMENTS First and foremost, we would like to thank our promoter, prof. dr. Gert Peersman and our co-promoter, Selien De Schryder for their guidance on this master thesis over these past two years. We are very grateful to Jef Boeckx, Economist at the National Bank of Belgium, Luc Aucremanne, Head of Monetary Policy Research Department at the National Bank of Belgium, Alfons Verplaetse, former Governor of the National Bank of Belgium and Burcu Duygan-Bump, Senior Financial Economist at the Federal reserve Bank of Boston for their time, advice and for sharing their knowledge in their domain of expertise. Furthermore, we would like to render thanks to Nasser Hanafy, Senior Communications Assistant at the European Central Bank, for giving us the opportunity to attend the workshop on the “Macroeconomic impact of non-standard monetary policy measures” in Frankfurt Am Main. Last, special thanks go to our parents for their moral and financial support, not only during the last two years but during our entire academic career. May 2011, Alexander Naessens & Sabien Windels I TABLE OF CONTENTS Acknowledgements ....................................................................................................................................................................... I Table of contents ...........................................................................................................................................................................II Abbreviations ................................................................................................................................................................................ IV List of figures ................................................................................................................................................................................. VI List of tables ................................................................................................................................................................................. VII 0 Introduction ........................................................................................................................................................... - 1 - PART I A comparison between the Federal Reserve and the European Central Bank ............................ - 3 - 1 A short refreshment .............................................................................................................. - 5 - 1.1 Macroeconomic causes .................................................................................................................................... - 5 - 1.2 Microeconomic causes ..................................................................................................................................... - 6 - 1.3 Concurrence of circumstances ..................................................................................................................... - 7 - 2 A high-level comparison ...................................................................................................... - 9 - 2.1 Differences in economical and financial structure ............................................................................ - 9 - 2.1.1 Economic structure ............................................................................................................................................ - 9 - 2.1.2 Financial structure ...........................................................................................................................................- 10 - 2.2 Comparison between the Federal Reserve and the European Central Bank .....................- 15 - 2.2.1 A typology .............................................................................................................................................................- 15 - 2.2.2 Beyond the typology........................................................................................................................................- 20 - 2.3 Conclusion ............................................................................................................................................................- 26 - 3 The toolbox of the Federal Reserve and the European Central Bank .................... - 28 - 3.1 Theoretical introduction ...............................................................................................................................- 29 - 3.2 The toolbox of the Federal Reserve .........................................................................................................- 30 - 3.2.1 The pre-Lehman period .................................................................................................................................- 30 - 3.2.2 The post-Lehman period ...............................................................................................................................- 34 - 3.3 The toolbox of the European Central Bank .........................................................................................- 45 - 3.3.1 The pre-Lehman period .................................................................................................................................- 46 - 3.3.2 The post-Lehman period ...............................................................................................................................- 48 - 3.4 Conclusion ............................................................................................................................................................- 52 - PART II On the effectiveness ................................................................................................................................................- 53 - 4 The effectiveness of the non-standard measures: the Federal Reserve ............... - 57 - 4.1 Interbank market ..............................................................................................................................................- 57 - II 4.1.1 Market response ................................................................................................................................................- 57 - 4.1.2 Data ..........................................................................................................................................................................- 59 - 4.1.3 Econometrical analysis ..................................................................................................................................- 62 - 4.2 The asset-backed commercial paper market .....................................................................................- 73 - 4.2.1 Market response ................................................................................................................................................- 73 - 4.2.2 Data ..........................................................................................................................................................................- 76 - 4.2.3 Econometrical analysis ..................................................................................................................................- 77 - 4.3 The commercial paper market ...................................................................................................................- 82 - 4.3.1 Market response ................................................................................................................................................- 82 - 4.3.2 Data ..........................................................................................................................................................................- 83 - 4.3.3 Econometrical analysis ..................................................................................................................................- 84 - 4.4 The asset-backed securities market ........................................................................................................- 88 - 4.5 Other key markets ............................................................................................................................................- 92 - 4.5.1 Market response ................................................................................................................................................-
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