Did the commercial paper funding facility prevent a Great Depression style money market meltdown?

Duca, John V.

doi:10.1016/j.jfs.2012.04.002

Cited by 22 publications

(5 citation statements)

References 35 publications

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“…As per Reinhart and Rogoff (2011), we identify the three pre-2007 liquidity crises as follows: (1) the oil crisis of 1975, (2) the savings and loan crisis of 1984-1991, and (3) the information technology bubble and energy crisis of 2002-2003. 11 In contrast to the relatively moderate liquidity crises, the financial system suffered much more pronounced adverse liquidity conditions during the most recent crisis, when bank, bond, and equity financing sources were simultaneously affected (Gorton & Metrick, 2012;Duca, 2013).…”

Section: Identifying the Liquidity Crisesmentioning

confidence: 99%

The impact of liquidity crises on cash flow sensitivities

Drobetz

Haller

Meier

et al. 2017

The Quarterly Review of Economics and Finance

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We examine the relationship between liquidity crises and frictions in raising funds, and find that both the gap between the cash flow sensitivities of financially healthy and weak firms and the cash flow sensitivities of healthy and weak firms themselves are positively correlated with the severity of liquidity crises. Using a multi-equation model of cash flow sensitivities, we find that moderate liquidity crises mostly affect firms' financing activities. The recent financial crisis was especially severe for financially weak firms and curtailed both their investment and financing decisions. Financially healthy firms were able to protect their investments by maintaining financial flexibility.

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Section: Identifying the Liquidity Crisesmentioning

confidence: 99%

The impact of liquidity crises on cash flow sensitivities

Drobetz

Haller

Meier

et al. 2017

The Quarterly Review of Economics and Finance

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“…However, Duygan‐Bump et al (2013) study the AMLF and conclude this facility helped stabilize asset outflows from MMFs and significantly reduced ABCP yields. Duca (2013) concludes that the Fed interventions in the money market helped prevent the commercial paper market from melting down. Another strand of literature investigates the impact of the MMLF.…”

Section: Institutional Background Of the Mmlf And The Related Literaturementioning

confidence: 99%

The effect of the Money Market Mutual Fund Liquidity Facility (MMLF) on corporate short‐term borrowing costs

Jang

2023

J of Financial Research

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In this article, I study the effect of the Money Market Fund Liquidity Facility (MMLF) on corporate short‐term borrowing costs. Although MMLF loans accept a broader range of collateral acquired from money market funds (MMFs) than Asset‐Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) loans, their higher loan rates could make the intervention less effective. I find the average yield has decreased by 20–24 basis points. The yield‐decreasing effects of the MMLF are stronger for securities issued by eligible non‐US firms, non‐asset‐backed commercial paper securities that are newly accepted as collateral under the MMLF, and securities held by affiliated MMFs. However, I do not find an additional yield‐decreasing effect of the MMLF on lower rated securities or nonfinancial sector securities. After the implementation of the MMLF, domestic MMFs seem to increase the weight of nonfinancial sector securities, which helps them achieve a higher return.

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“…This led the Fed to create facilities to unclog the arteries of the financial system. In particular, via the Commercial Paper Funding Facility the Fed purchased newly issued, top-grade paper and helped cap and then lower the paper-bill spread (Duca, 2013a).…”

Section: The Baa-treasury Spread Fed Policy In Crises and The Financial Acceleratormentioning

confidence: 99%

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

Bordo

Duca

2020

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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 nonrecession 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.

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Did the commercial paper funding facility prevent a Great Depression style money market meltdown?

Cited by 22 publications

References 35 publications

The impact of liquidity crises on cash flow sensitivities

The impact of liquidity crises on cash flow sensitivities

The effect of the Money Market Mutual Fund Liquidity Facility (MMLF) on corporate short‐term borrowing costs

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

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