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cash rate. Like the federal funds rate, the overnight cash rate is the interest rate
for very short-term interbank loans. The monetary policy tools used by the European
Central Bank are similar to those used by the Federal Reserve and involve open
market operations, lending to banks, and reserve requirements.
for a one-year period, and a Government-Sponsored
Entities Purchase Program, in which the Fed made a
commitment to buy $100 billion of debt issued
by Fannie Mae and Freddie Mac and other
government-sponsored enterprises (GSEs), as well
as $500 billion of mortgage-backed securities guar-
anteed by these GSEs.
In the aftermath of the Lehman Brothers failure, the
Fed also extended large amounts of credit directly to
financial institutions that needed to be bailed out.
In late September, the Fed agreed to lend over
$100 billion to prop up AIG and also authorized the
Federal Reserve Bank of New York to purchase mort-
gage-backed and other risky securities from AIG to
pump more liquidity into the company. In November,
the Fed committed over $200 billion to absorb 90%
of losses resulting from the federal government’s guar-
antee of Citigroup’s risky assets, while in January, it
did the same thing for Bank of America, committing
over $80 billion.
The expansion of the Fed’s lender-of-last-resort pro-
grams during the 2007–2009 financial crisis was
indeed remarkable, expanding the Fed’s balance
sheet by over one trillion dollars by the end of 2008,
with continuing expansion thereafter. The unprece-
dented expansion in the Fed’s balance sheet demon-
strated the Fed’s commitment to get the financial
markets working again.
facility, the Asset-Backed Commercial Paper Money
Market Mutual Fund Liquidity Facility (AMLF), in
which the Fed would lend to primary dealers so that
they could purchase asset-backed commercial paper
from money market mutual funds. By so doing,
money market mutual funds would be able to unload
their asset-backed commercial paper when they
needed to sell it to meet the demands for redemptions
from their investors. A similar facility, the Money
Market Investor Funding Facility (MMIFF), was set up
on October 21, 2008, to lend to special-purpose
vehicles that could buy a wider range of money mar-
ket mutual funds assets. On October 7, 2008, the
Fed announced another liquidity facility to promote
the smooth functioning of the commercial paper mar-
ket that had also begun to seize up, the Commercial
Paper Funding Facility (CPFF). With this facility, the
Fed could buy commercial paper directly from issuers
at a rate 100 basis points above the expected fed-
eral funds rate over the term of the commercial
paper. To restrict the facility to rolling over existing
commercial paper, the Fed stipulated that each issuer
could sell only an amount of commercial paper that
was less than or equal to its average amount out-
standing in August 2008. Then on November 25,
2008, the Fed announced two new liquidity facilities,
the Term Asset-Backed Securities Loan Facility (TALF),
in which it committed to the financing of $200 billion
(later raised to $1 trillion) of asset-backed securities
Chapter 10 Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
231
Open Market Operations
Like the Federal Reserve, the European Central Bank uses open market operations
as its primary tool for conducting monetary policy and setting the overnight cash rate
at the target financing rate. Main refinancing operations are the predominant form
of open market operations and are similar to the Fed’s repo transactions. They involve
weekly reverse transactions (purchase or sale of eligible assets under repurchase
or credit operations against eligible assets as collateral) that are reversed within
two weeks. Credit institutions submit bids, and the European Central Bank decides
which bids to accept. Like the Federal Reserve, the European Central Bank accepts
the most attractively priced bids and makes purchases or sales to the point where the
desired amount of reserves are supplied. In contrast to the Federal Reserve, which
conducts open market operations in one location at the Federal Reserve Bank of New
York, the European Central Bank decentralizes its open market operations by hav-
ing them be conducted by the individual national central banks.
A second category of open market operations is the longer-term refinancing
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