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

  • Marco Del Negro
  • Gauti Eggertsson
  • Andrea Ferrero
  • Nobuhiro Kiyotaki

We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities, explicitly incorporating the zero bound on the short-term nominal interest rate. Within this framework, we 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 exchanges liquid government assets 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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Date of creation: 2011
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Handle: RePEc:fip:fednsr:520
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  1. Juan-Carlos Cordoba & Marla Ripoll, 2004. "Credit Cycles Redux," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1011-1046, November.
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  11. repec:clu:wpaper:0809-02 is not listed on IDEAS
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  13. 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.
  14. Tobias Adrian & Christopher R. Burke & James J. McAndrews, 2009. "The Federal Reserve's Primary Dealer Credit Facility," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 15(Aug).
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