can central bank transparency go too far? ”, nber working paper no. 10829, p. 25. in fact, the bank of england would have preferred to act covertly, but the market abuses directive prevented this ( http : / / www. guardian. co. uk / business / 2007 / sep / 21 / 14 ). credit. at the same time, interest rates on risk - free securities such as government notes have declined. the result is a significant increase in the ted spread ( the difference between an uncollateralized interbank loan and the risk free rate of the same maturity ). with the 3 - month libor rising, central banks faced an important monetary policy decision. in countries where the official target rate is a central bank rate, for instance, the euro zone, the 3 - month libor became increasingly disconnected from the official target rate ( typically a repo rate of two weeks or less ). as you can see from graph 1a, the ecb held its official target rate ( the two - week repo rate ) constant and therefore tolerated an increase in the 3month libor. it is currently about 70 bp above the repo rate of the ecb ; this spread is now more than twice as large as it was in the first week of august. the bank of england also held the official rate constant throughout the market turbulence. as you can see from graph 1b, the initial increase of the 3 - month sterling libor was slightly more pronounced than the one for the euro. currently, the difference between the 3 - month libor and the official target rate is roughly equivalent for the two currencies. in the case of switzerland, where the official target rate is the 3 - month libor rate, the emerging risk premium meant that the official target rate was driven higher immediately after the turmoil began in early august. you can see this is graph 1c. due to a significant reduction in the short - term repo rate of the snb, the 3 - month libor has since receded to about the level of the first week of august. as you know, the federal reserve has lowered the fed funds rate in two steps by 75 basis points to a target level of 4. 5 %. as a result and as you can see in graph 1d, after the first cut in the fed funds, the 3 - month libor fell somewhat below the level of august 9. after the second rate cut the 3 - month

in normal times and in times of crisis. let me illustrate this point by a recapitulation of the developments surrounding the bank of england ’ s liquidity support to northern rock. northern rock had apparently been facing some institutional deposit outflows for a few days in september 2007. but the run on the bank only started when the emergency liquidity assistance of the bank of england became public, incidentally by way of a news report from the bbc. 17 the outflows stopped immediately after the u. k. treasury issued a blanket deposit guarantee. the northern rock case is a reminder of the importance that psychology plays in times of crises. as central banks, we need to consider carefully to what extent instant transparency with regard to liquidity operations may end up being counterproductive. let me add here that this is a very complex issue. i am not arguing that the evolution towards greater transparency in central banking should be reversed. indeed, perhaps we need greater ex ante transparency such as clearly stated conditions and eligibility criteria associated with central bank liquidity provisions. undoubtedly, ex post transparency about potential liquidity support measures must also be guaranteed. but in the midst of a crisis, it may well be beneficial and desirable for central banks to have some flexibility with regard to how they communicate regarding potential liquidity operations. 2. 2. implications of volatile risk premia for the conduct of monetary policy my second tentative lesson directly relates to the conduct of monetary policy. the recent market strains are unusual because confidence or rather the lack of confidence plays such an important role. clearly, there is a great deal of uncertainty regarding valuations of complex credit instruments. moreover and arguably more importantly, banks realize that they are facing or could face large contingent liabilities. they are therefore doing everything they can to protect their balance sheets. in essence, banks are hoarding liquidity and are reluctant to lend money in the interbank market beyond the very short term. as a result, a substantial and highly unusual risk premium has emerged in the interbank market. the risk premium in the interbank market has generally driven up the 3 - month libor which serves as the reference rate for the pricing of georgios chortareas, david stasavage, and gabriel sterne, 2002, “ does it pay to be transparent? international evidence from central bank forecasts ”, review of the federal reserve bank of st. louis, july / august, 99 - 117. frederic s. mishkin, 2004, “