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

  • Negro, Marco Del

    (Federal Reserve Bank of New York)

  • Eggertsson, Gauti B.


    (Brown University)

  • Ferrero, Andrea


    (University of Oxford)

  • Kiyotaki, Nobuhiro


    (Princeton University)

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.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 520.

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Length: 76 pages
Date of creation: 2011
Date of revision: 01 May 2016
Handle: RePEc:fip:fednsr:520
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  15. Tobias Adrian & Emanuel Moench & Hyun Song Shin, 2010. "Macro risk premium and intermediary balance sheet quantities," Staff Reports 428, Federal Reserve Bank of New York.
  16. Han Chen & Vasco Cúrdia & Andrea Ferrero, 2012. "The Macroeconomic Effects of Large‐scale Asset Purchase Programmes," Economic Journal, Royal Economic Society, vol. 122(564), pages F289-F315, November.
  17. Ajello, Andrea, 2010. "Financial intermediation, investment dynamics and business cycle fluctuations," MPRA Paper 32447, University Library of Munich, Germany, revised Mar 2011.
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