Liquidity Restrictions, Runs, and Central Bank Interventions: Evidence from Money Market Funds

54 Pages Posted: 26 May 2020 Last revised: 18 Jun 2021

See all articles by Lei Li

Lei Li

Board of Governors of the Federal Reserve System

Yi Li

Board of Governors of the Federal Reserve System

Marco Macchiavelli

Board of Governors of the Federal Reserve System

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System

Date Written: May 24, 2021

Abstract

Liquidity restrictions on investors, like the redemption gates and liquidity fees introduced in the 2016 money market fund (MMF) reform, are meant to improve financial stability. However, we find evidence that such liquidity restrictions exacerbated the run on prime MMFs during the COVID-19 crisis. Our results indicate that gates and fees could generate strategic complementarities among investors in crisis times. Severe outflows from prime MMFs led the Federal Reserve to intervene with the Money Market Mutual Fund Liquidity Facility (MMLF). Using MMLF micro-data, we show how the provision of "liquidity of last resort" stabilized prime funds.

Keywords: runs, money market funds, redemption gates and liquidity fees, strategic complementarities, COVID-19, MMLF

JEL Classification: G23, G28, E58

Suggested Citation

Li, Lei and Li, Yi and Macchiavelli, Marco and Zhou, Xing (Alex), Liquidity Restrictions, Runs, and Central Bank Interventions: Evidence from Money Market Funds (May 24, 2021). Available at SSRN: https://ssrn.com/abstract=3607593 or http://dx.doi.org/10.2139/ssrn.3607593

Lei Li

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Yi Li

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-721-4576 (Phone)

HOME PAGE: http://sites.google.com/view/yili/

Marco Macchiavelli (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Xing (Alex) Zhou

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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