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The great escape - a quantitative evaluation of the fed's liquidity facilities

Author(s): Negro, MD; Eggertsson, G; Ferrero, A; Kiyotaki, Nobuhiro

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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. (JEL E13, E31, E43, E44, E52, E58, G01).
Publication Date: 1-Mar-2017
Citation: Negro, MD, Eggertsson, G, Ferrero, A, and Kiyotaki, N. (2017). The great escape - a quantitative evaluation of the fed's liquidity facilities. American Economic Review, 107 (3), 824 - 857. doi:10.1257/aer.20121660
DOI: doi:10.1257/aer.20121660
ISSN: 0002-8282
Pages: 824 - 857
Type of Material: Journal Article
Journal/Proceeding Title: American Economic Review
Version: Final published version. Article is made available in OAR by the publisher's permission or policy.

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