Puriya Abbassi (University of Mainz), Isabel Schnabel (University of Mainz, CEPR and MPI Bonn):
Abstract
Starting in August 2007, the spreads between unsecured and secured money marketrates (repo spreads) increased sharply and became highly correlated across regions.This paper investigates empirically whether this can be explained by contagious effects the interbank market. Our results suggest that shocks to one market were transmitted to other money markets. Moreover, repo spreads decreased in reaction to the provision of liquidity by central banks in the same and in other regions. This suggests that liquidity problems lay at the core of the observed strains in interbank markets and of the transmission of shocks across regions.
