Money markets and monetary policy implementation in times of crisis

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Money markets are crucial for the transmission of monetary policy and play a central role in the financial system. Before August 2007, many assumed these markets operated smoothly, with limited empirical research on their functioning. This view was dramatically challenged by the subprime crisis in 2007 and the collapse of Lehman Brothers in 2008, which halted liquidity redistribution in money markets. Various market imperfections emerged, including banks' concerns about funding liquidity risks, adverse selection, interactions between market and funding liquidity, the dominance of liquidity-rich banks, and search costs in the European interbank market. Research on these imperfections, particularly during the financial crisis in the Euro area, remains limited. Utilizing unique data from a central bank and a major money market maker, this work offers a fresh perspective on Euro area money markets across five chapters. It evaluates the effectiveness of monetary policy actions in addressing these imperfections and provides policy recommendations for the design and implementation of monetary policy and lender-of-last-resort measures. Additionally, it introduces indicators for systematically assessing and identifying potentially liquidity-stressed banks at the micro-prudential level.