Liquidity Restrictions, Runs, and Central Bank Interventions: Evidence from Money Market Funds

Dealer financial conditions and lender-of-last-resort facilities

Lei Li, Yi Li, Marco Macchiavelli and Xing (Alex) Zhou

The Review of Financial Studies, 2021, vol. 34, issue 11, 5402-5437

Abstract: Liquidity restrictions on investors, like the redemption gates and liquidity fees introduced in the 2016 money market fund (MMF) reform, are meant to improve financial stability. However, we find evidence that such liquidity restrictions exacerbated the run on prime MMFs during the COVID-19 crisis. Our results indicate that gates and fees could generate strategic complementarities among investors in crisis times. Severe outflows from prime MMFs led the Federal Reserve to intervene with the Money Market Mutual Fund Liquidity Facility (MMLF). Using MMLF microdata, we show how the provision of “liquidity of last resort” stabilized prime funds.

JEL-codes: E58 G23 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (30)

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