The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities - Federal Reserve Bank of New York

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The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities

October 2011 Number 520
Revised May 2016

JEL classification: E44, E58

Authors: Marco Del Negro, Gauti Eggertsson, Andrea Ferrero, and Nobuhiro Kiyotaki

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 U.S. 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 we show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-09.

Available only in PDF pdf

76 pages / 2,309 kb

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