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

64 Pages Posted: 7 Oct 2011

See all articles by Marco Del Negro

Marco Del Negro

Federal Reserve Bank of New York

Gauti B. Eggertsson

Federal Reserve Bank of New York

Andrea Ferrero

University of Oxford - Department of Economics

Nobuhiro Kiyotaki

Princeton University - Department of Economics

Date Written: October 1, 2011

Abstract

We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities, explicitly incorporating the zero bound on the short-term nominal interest rate. Within this framework, we 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 exchanges liquid government assets 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

JEL Classification: E44, E58

Suggested Citation

Del Negro, Marco and Eggertsson, Gauti B. and Ferrero, Andrea and Kiyotaki, Nobuhiro, The Great Escape? A Quantitative Evaluation of the Fed’s Liquidity Facilities (October 1, 2011). FRB of New York Staff Report No. 520, Available at SSRN: https://ssrn.com/abstract=1939924 or http://dx.doi.org/10.2139/ssrn.1939924

Marco Del Negro (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Gauti B. Eggertsson

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Andrea Ferrero

University of Oxford - Department of Economics ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

Nobuhiro Kiyotaki

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

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