The Real Effects of Government Liquidity Provision: Evidence from the Commercial Paper Funding Facility

40 Pages Posted: 26 Mar 2014 Last revised: 22 Feb 2016

See all articles by Bo Li

Bo Li

Tsinghua University - PBC School of Finance

Date Written: November 1, 2015

Abstract

This paper investigates the effectiveness of the Federal Reserve Bank's Commercial Paper Funding Facility (CPFF) in facilitating lending from recipient banks to their relationship borrowers. I use dispersion in lender liquidity following the implementation of the CPFF to examine the change in the supply of credit on borrowers’ corporate policies. This paper first shows that (recipient) banks with access to the Commercial Paper Funding Facility have a higher probability of offering new loans and increase the amounts of loan provision to relationship firms than banks without the liquidity backstop. Second, the increases in bank lending is associated with higher employment growth for firms with significant business relationships to these banks. Therefore, the short-term funding facility generates positive spill-over effects from financial institutions to non-financial institutions.

Keywords: Explicit Guarantees, Government Bailout, Liquidity Provision, Rollover Risk

JEL Classification: G01, G21, G28

Suggested Citation

Li, Bo, The Real Effects of Government Liquidity Provision: Evidence from the Commercial Paper Funding Facility (November 1, 2015). PBCSF-NIFR Research Paper No. 14-02, Available at SSRN: https://ssrn.com/abstract=2414488 or http://dx.doi.org/10.2139/ssrn.2414488

Bo Li (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China
+86 10-627982146 (Phone)

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