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The Regulation of Money Market Funds: Adding Discipline to the Policy Debate

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  • Cecilia Parlatore Siritto

    (University of Pennsylvania)

Abstract

I develop an equilibrium model of U.S. money market funds (MMFs) and use it to analyze the effect of recently proposed regulations on the liquidity provided by these funds and their fragility. The model captures some of the key institutional features of MMFs, such as the "breaking the buck" liquidation rule and voluntary sponsor support, and it is consistent with several stylized facts identified in the literature on MMFs. In the model, the MMF industry may be prone to runs different from the canonical bank runs. These are not runs of investors on the MMFs but of the MMFs on the asset market. Moreover, the model shows that, even in a stylized setup, the policy analysis is complex. Regulation affects the payoffs from intermediation not only directly, but also through the fees, the sponsors' support decision, and asset prices, all of which are determined in equilibrium. The model takes into account general equilibrium effects that are not present in the current policy discussion and shows that they can overturn conventional intuition.

Suggested Citation

  • Cecilia Parlatore Siritto, 2013. "The Regulation of Money Market Funds: Adding Discipline to the Policy Debate," 2013 Meeting Papers 102, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:102
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    Cited by:

    1. Huberto M. Ennis, 2012. "Some theoretical considerations regarding net asset values for money market funds," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(4Q), pages 231-254.

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