Central Bank Liquidity Facilities and Market Making

David Cimon and Adrian Walton

Staff Working Papers from Bank of Canada

Abstract: In the onset of the COVID-19 crisis, central banks purchased large volumes of assets in an effort to keep markets operational. We model one such central bank, which purchases assets from dealers to alleviate balance sheet constraints. Asset purchases can prevent market breakdown, improve price efficiency and reduce dealer risk positions. A central bank that purchases assets at their expected value is able to achieve market outcomes as if dealers were unconstrained. Absent other concerns, central banks can maximize welfare by purchasing assets at a premium, though they may create market distortions. Alternatively, central banks who bear costs associated with large interventions may only be willing to purchase assets at a discount. In the absence of leverage constraints, lending programs are as effective as asset purchases; when leverage constraints are present, lending programs lose effectiveness.

Keywords: Coronavirus disease (COVID-19); Economic models; Financial institutions; Financial markets; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: G10 G20 L10 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Journal Article: Central bank liquidity facilities and market making (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:22-9

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