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Pricing Liquidity without Preemptive Runs

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Abstract

Prime money market funds (MMFs) are vulnerable to runs. This was dramatically illustrated in September 2008 and March 2020, when massive outflows from prime MMFs worsened stress in the short-term funding markets and eased only after taxpayer-supported interventions by the Treasury and the Federal Reserve. In this post, we describe how mechanisms like swing pricing that charge a price for liquidity can reduce the vulnerability of prime MMFs without triggering preemptive runs.

Suggested Citation

  • Marco Cipriani & Antoine Martin & Patrick E. McCabe, 2022. "Pricing Liquidity without Preemptive Runs," Liberty Street Economics 20220131, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:93651
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    File URL: https://libertystreeteconomics.newyorkfed.org/2022/01/pricing-liquidity-without-preemptive-runs/
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    More about this item

    Keywords

    MMF; swing pricing; liquidity; preemptive; preemptive runs;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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