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

Marco Del Negro, Gauti Eggertsson, Andrea Ferrero and Nobuhiro Kiyotaki

No 520, Staff Reports from Federal Reserve Bank of New York

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.

Keywords: financial crisis; liquidity shocks; financing constraints; liquidity facilities; zero lower bound (search for similar items in EconPapers)
JEL-codes: E44 E58 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (32)

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Related works:
Journal Article: The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities (2017)
Working Paper: The Great Escape? A Quantitative Evaluation of the Fed’s Liquidity Facilities (2016)
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