Liquidity Backstops and Dynamic Debt Runs

70 Pages Posted: 17 Jun 2015

See all articles by Bin Wei

Bin Wei

Federal Reserve Bank of Atlanta

Zhanwei Yue

Emory University; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: June 15, 2015

Abstract

Liquidity backstops have important implications for financial stability. In this paper we provide a microfoundation for the important role of liquidity backstops in mitigating runs (or, conversely, the role of the lack of liquidity backstops in exacerbating runs) based on a dynamic model of debt runs. We focus on the municipal bond markets for variable rate demand obligations (VRDOs) and auction rate securities (ARS). The different experiences in these markets during the recent financial crisis of 2007-09 provide a natural experiment to identify the value of a liquidity backstop in mitigating runs. Through structural estimation of the model, we show that the value of a liquidity backstop is about 14.5 basis points per annum. The results in this paper shed light on one central difference between shadow banks and traditional banks in terms of their differential access to public liquidity backstops.

Keywords: Liquidity Backstop, Debt Run

JEL Classification: G10, G20, G21

Suggested Citation

Wei, Bin and Yue, Zhanwei, Liquidity Backstops and Dynamic Debt Runs (June 15, 2015). Available at SSRN: https://ssrn.com/abstract=2618878 or http://dx.doi.org/10.2139/ssrn.2618878

Bin Wei (Contact Author)

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

HOME PAGE: http://https://www.frbatlanta.org/research/economists/wei-bin.aspx

Zhanwei Yue

Emory University ( email )

201 Dowman Drive
Atlanta, GA 30322
United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

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