The sub-prime crisis and UK monetary policy


Martin, C. and Milas, C., 2010. The sub-prime crisis and UK monetary policy. International Journal of Central Banking, 6 (3), pp. 119-144.

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The “sub-prime” crisis, which led to major turbulence in global financial markets beginning in mid-2007, has posed major challenges for monetary policymakers. We analyse the impact on monetary policy of the widening differential between policy rates and the 3-month Libor rate, the benchmark for private sector interest rates. We show that the optimal monetary policy rule should include the determinants of this differential, adding an extra layer of complexity to the problems facing policymakers. Our estimates reveal significant effects of risk and liquidity measures, suggesting the widening differential between base rates and Libor was largely driven by a sharp increase in unsecured lending risk. We calculate that the crisis increased libor by up to 60 basis points; in response base rates fell further and quicker than would otherwise have happened as policymakers sought to offset some of the contractionary effects of the sub-prime crisis


Item Type Articles
CreatorsMartin, C.and Milas, C.
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Uncontrolled Keywordsoptimal monetary policy,sub-prime crisis
DepartmentsFaculty of Humanities & Social Sciences > Economics
ID Code19514


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