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The great escape? A quantitative evaluation of the Fed’s liquidity facilities

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  • Negro, Marco Del

    (Federal Reserve Bank of New York)

  • Eggertsson, Gauti B.

    () (Brown University)

  • Ferrero, Andrea

    () (University of Oxford)

  • Kiyotaki, Nobuhiro

    () (Princeton University)

Abstract

We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 U.S. financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and we show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-09.

Suggested Citation

  • Negro, Marco Del & Eggertsson, Gauti B. & Ferrero, Andrea & Kiyotaki, Nobuhiro, 2011. "The great escape? A quantitative evaluation of the Fed’s liquidity facilities," Staff Reports 520, Federal Reserve Bank of New York, revised 01 May 2016.
  • Handle: RePEc:fip:fednsr:520
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    More about this item

    Keywords

    financial crisis; liquidity shocks; financing constraints; liquidity facilities; zero lower bound;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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