American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities
American Economic Review
vol. 107,
no. 3, March 2017
(pp. 824–57)
Abstract
We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities and ask: can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 US financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government provides liquidity in exchange for illiquid private paper? We find that the effects of the liquidity shock can be large, and show some numerical examples in which the liquidity facilities of the Federal Reserve prevented a repeat of the Great Depression in the period 2008-2009.Citation
Del Negro, Marco, Gauti Eggertsson, Andrea Ferrero, and Nobuhiro Kiyotaki. 2017. "The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities." American Economic Review, 107 (3): 824–57. DOI: 10.1257/aer.20121660Additional Materials
JEL Classification
- E13 General Aggregative Models: Neoclassical
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- G01 Financial Crises