Sterling money markets are a critical part of the plumbing of the UK financial system. They act as the main conduit for short-term borrowing and lending between banks, and a whole range of other institutions, financial and non-financial. And the ebb and flow of activity in sterling money markets is also crucial to the Bank of England as the first stage in the transmission mechanism of monetary policy, linking changes in the Bank’s policy rate – Bank Rate – to activity and prices in the wider economy. So when things go wrong in this market, as they did during the financial crisis, the effects reach into every part of the UK economy and, given the significant role of international banks in London, beyond. So what happened in the autumn of 2008, and why?
Continue reading “‘Neither a borrower nor a lender be’: How the sterling money markets dried up”
Over the last twenty years, the BOE has carried out a number of reforms to its operational framework which have been partly intended to reduce money market volatility. My analysis suggests that these have been successful. Overnight volatility fell by around 90% since the early 2000s and much of this can be explained by the BOE’s reforms. But I find little evidence that this affected the volatility of term rates, which are more important than overnight rates for monetary policy transmission. Therefore, central banks might consider giving less priority to money market volatility when designing their future operating frameworks.
Continue reading “Have reforms to the BOE’s operating framework reduced money market volatility, and does this matter for monetary policy transmission?”