Do Interventions in Secondary Markets Affect the Economy?

Abstract

During COVID-19, the Federal Reserve created the Secondary Market Corporate Credit Facility (SMCCF) to purchase corporate bonds and ETFs to "support credit to employers by providing liquidity." Using a difference-in-differences analysis, we compare firms with bonds purchased by the SMCCF to similar firms whose bonds were not purchased.  The SMCCF improved secondary market liquidity, changed issuance behavior, and changed capital allocation within firms, however it did not change investment or employment. ETF purchases had smaller effects because they passed-through less capital to the underlying assets. Our results suggest interventions in secondary markets improve market quality which generates some real effects.

Keywords: Bond Markets, Liquidity, Real Effects, Secondary Market Interventions

JEL Classification: G12, G14