Liquidity Restrictions, Runs, and Central Bank Interventions: Evidence from Money Market Funds
54 Pages Posted: 26 May 2020 Last revised: 18 Jun 2021
Date Written: May 24, 2021
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 micro-data, we show how the provision of "liquidity of last resort" stabilized prime funds.
Keywords: runs, money market funds, redemption gates and liquidity fees, strategic complementarities, COVID-19, MMLF
JEL Classification: G23, G28, E58
Suggested Citation: Suggested Citation