How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the Covid-19 Recession

54 Pages Posted: 16 Nov 2020 Last revised: 10 Oct 2021

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

John V. Duca

Oberlin College; Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 2 versions of this paper

Date Written: November 2020

Abstract

In the financial crisis and recession induced by the Covid-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned bonds of corporations rated as investment grade before the Covid pandemic at spreads roughly 1 percentage point above non-recession averages. A careful splicing of different unemployment rate series enables us to assess the effectiveness of recent Fed interventions in these long-term debt markets over long sample periods, spanning the Great Depression, Great Recession and the Covid Recession. Findings indicate that the announcement of forthcoming corporate bond backstop facilities have capped risk premia at levels 100 basis points above non-recession averages, akin to a “penalty rate” for lender of last resort interventions during financial crises. In doing so, these Fed facilities have limited the role of external finance premia in amplifying the macroeconomic impact of the Covid pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort, and pursuing credit policies.

Suggested Citation

Bordo, Michael D. and Duca, John V., How New Fed Corporate Bond Programs Dampened the Financial Accelerator in the Covid-19 Recession (November 2020). NBER Working Paper No. w28097, Available at SSRN: https://ssrn.com/abstract=3731267

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

John V. Duca

Oberlin College

Oberlin, OH 44074
United States

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

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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