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The Option Value of Municipal Liquidity

Author

Listed:
  • Andrew Haughwout
  • Benjamin Hyman
  • Or Shachar

Abstract

States and localities are relied upon to implement macroeconomic stabilization policies and ensure service delivery in times of crisis. In April 2020, the introduction of the Municipal Liquidity Facility (MLF) added an emergency lending instrument to the policy arsenal, guaranteeing liquidity, but at a price. Using a regression discontinuity design that exploits MLF-lending-eligibility population cutoffs, we find that the MLF contributed to the easing of liquidity pressures and reduced perceived credit risk for municipal borrowers. Low-rated issuers experienced yield reductions of at least 26 bps. We also provide suggestive evidence that these liquidity effects translated into employment gains.

Suggested Citation

  • Andrew Haughwout & Benjamin Hyman & Or Shachar, 2026. "The Option Value of Municipal Liquidity," American Economic Journal: Economic Policy, American Economic Association, vol. 18(3), pages 306-341, August.
    • Handle: RePEc:aea:aejpol:v:18:y:2026:i:3:p:306-41
    DOI: 10.1257/pol.20240197
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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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