Monetary Policy Shocks and Risk Premia in the Interbank Market

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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.
Original languageEnglish
JournalThe B.E. Journals in Macroeconomics
Issue number1, Article 4
Publication statusPublished - 2011

ID: 33928357