Liquidity Restrictions, Runs, and Central Bank Interventions: Evidence from Money Market Funds

Abstract

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 might have 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). By providing "liquidity of last resort," the MMLF stopped the MMF run and stabilized short-term funding markets.

Keywords: runs, money market funds, redemption gates and liquidity fees, strategic complementarities, Covid-19, MMLF

JEL Classification: G23, G28, E58