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The two main explanations for the 2007-2009 financial crisis in the money markets are credit concerns and liquidity issues. These risks are intimately related, especially in the money markets, and either can lead to somewhat similar behavior by market participants. We study the U.S. commercial paper (CP) market to draw insights about the nature of the crisis which resulted in the amount of outstanding CP shrinking from the peak of $2.18 trillion in early August 2007 to $1.27 trillion in early July 2009. However, the CP market is not homogeneous in terms of credit quality, maturities and types of issues and we show that not all CP issuers suffered equally. We find that the crisis in the money markets appears to be related more to increases in perceived credit risk, with liquidity concerns being a secondary issue.


This article was originally published in Financial Review 46, no. 4 (2011): 541-67.