American Economic Journal:
Economic Policy
ISSN 1945-7731 (Print) | ISSN 1945-774X (Online)
The Option Value of Municipal Liquidity
American Economic Journal: Economic Policy
(pp. 306–41)
Abstract
States and localities are relied upon to implement macroeconomic stabilization policies and ensure service delivery in times of crisis. In April 2020, the introduction of the Municipal Liquidity Facility (MLF) added an emergency lending instrument to the policy arsenal, guaranteeing liquidity, but at a price. Using a regression discontinuity design that exploits MLF-lending-eligibility population cutoffs, we find that the MLF contributed to the easing of liquidity pressures and reduced perceived credit risk for municipal borrowers. Low-rated issuers experienced yield reductions of at least 26 bps. We also provide suggestive evidence that these liquidity effects translated into employment gains.Citation
Haughwout, Andrew, Benjamin Hyman, and Or Shachar. 2026. "The Option Value of Municipal Liquidity." American Economic Journal: Economic Policy 18 (3): 306–41. DOI: 10.1257/pol.20240197Additional Materials
JEL Classification
- E58 Central Banks and Their Policies
- H71 State and Local Taxation, Subsidies, and Revenue
- H72 State and Local Budget and Expenditures
- H75 State and Local Government: Health; Education; Welfare; Public Pensions
- H77 Intergovernmental Relations; Federalism; Secession