Measuring stress in money markets: A dynamic factor approach

We extract an index of interest rate spreads from various money market segments to assess the level of funding stress in real time. We find that during the 2007–2009 financial crisis, money markets switched between low and high stress regimes except for brief periods of extreme stress. Transitions to lower stress regimes are typically associated with the non-standard policy measures by the Federal Reserve. •We develop an index to monitor money market stress in real-time.•We model cyclical phases of the money market during the 2007–2009 financial crisis using a Markov-switching dynamic factor model.•Switches to lower stress regimes appear to be associated with nonstandard policy measures by the Fed.