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The Great Escape? A Quantitative Evaluation of the Fed’s Liquidity Facilities

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

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 show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-2009.

Suggested Citation

  • Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2016. "The Great Escape? A Quantitative Evaluation of the Fed’s Liquidity Facilities," NBER Working Papers 22259, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22259
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    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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