Reforming Money Market Funds

10 Pages Posted: 19 Jan 2011 Last revised: 20 Feb 2012

Martin N. Baily

Brookings Institution

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

John H. Cochrane

Hoover Institution; National Bureau of Economic Research (NBER); University of Chicago - Booth School of Business

Douglas W. Diamond

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Darrell Duffie

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER)

Kenneth R. French

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Robert J. Shiller

Yale University - Cowles Foundation; National Bureau of Economic Research (NBER); Yale University - International Center for Finance

Matthew J. Slaughter

Tuck School of Business at Dartmouth; National Bureau of Economic Research (NBER)

Hyun Song Shin

Bank for International Settlements

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

René M. Stulz

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Date Written: January 14, 2011

Abstract

The current stable-NAV model for prime money market funds exposes fund investors and systemically important borrowers to runs like those that occurred after the failure of Lehman in September 2008. This working paper, by the Squam Lake Group, argues that, to reduce this risk, funds should have either floating NAVs or buffers provided by their sponsors that can absorb losses up to a level to be set by regulators. We suggest alternative designs for such a buffer, as well as considerations that should be taken into account when determining its required size.

Suggested Citation

Baily, Martin N. and Campbell, John Y. and Cochrane, John H. and Diamond, Douglas W. and Duffie, Darrell and French, Kenneth R. and Kashyap, Anil K. and Mishkin, Frederic S. and Scharfstein, David S. and Shiller, Robert J. and Slaughter, Matthew J. and Shin, Hyun Song and Stein, Jeremy C. and Stulz, René M., Reforming Money Market Funds (January 14, 2011). Tuck School of Business Working Paper No. 2011-86; Rock Center for Corporate Governance at Stanford University Working Paper No. 109; Columbia Business School Research Paper No. 12-13. Available at SSRN: https://ssrn.com/abstract=1740663 or http://dx.doi.org/10.2139/ssrn.1740663

Martin N. Baily

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
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John Y. Campbell

Harvard University - Department of Economics ( email )

Littauer Center
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HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

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John H. Cochrane

Hoover Institution ( email )

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National Bureau of Economic Research (NBER)

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University of Chicago - Booth School of Business ( email )

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Douglas W. Diamond

University of Chicago - Booth School of Business ( email )

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James Darrell Duffie

Stanford University - Graduate School of Business ( email )

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National Bureau of Economic Research (NBER)

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Kenneth R. French

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

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United States

Anil K. Kashyap

University of Chicago, Booth School of Business ( email )

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Chicago, IL 60637
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773-702-7260 (Phone)
773 702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Federal Reserve Bank of Chicago ( email )

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Frederic S. Mishkin

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

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David S. Scharfstein

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
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617-496-8443 (Fax)

HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

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Robert J. Shiller

National Bureau of Economic Research (NBER) ( email )

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Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States
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203-432-6167 (Fax)

Yale University - Cowles Foundation ( email )

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New Haven, CT 06520-8281
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203-432-3708 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://www.econ.yale.edu/~shiller/

Matthew J. Slaughter

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Hyun Song Shin

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Jeremy C. Stein

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
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617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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Rene M. Stulz (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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