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The Federal Reserve Municipal Liquidity Facility (MLF): Where the municipal securities market and fed finally meet

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  • Craig L. Johnson
  • Tima T. Moldogaziev
  • Martin J. Luby
  • Ruth Winecoff

Abstract

The CARES Act authorized the Municipal Liquidity Facility (MLF) with an explicit purpose of aiding state and local governments with their liquidity needs during the COVID‐19 pandemic. Unlike other federal liquidity facilities authorized by the Act that offered short‐term financing to certain dealers and institutional investors in municipal securities, the MLF offered direct access to liquidity to eligible state and local governments. In this article we describe the MLF, including its legal arrangements, structural characteristics, and public policy features. We then empirically evaluate the pricing, credit rating, and issuer eligibility requirements of the MLF, in the context of other federal interventions, using difference‐in‐differences and interrupted time series analysis techniques. Finally, we propose suggestions for the evolution of the MLF and the Federal Reserve's liquidity provision role in response to continued exposure to and recovery from the COVID‐19 pandemic.

Suggested Citation

  • Craig L. Johnson & Tima T. Moldogaziev & Martin J. Luby & Ruth Winecoff, 2021. "The Federal Reserve Municipal Liquidity Facility (MLF): Where the municipal securities market and fed finally meet," Public Budgeting & Finance, Wiley Blackwell, vol. 41(3), pages 42-73, September.
    • Handle: RePEc:bla:pbudge:v:41:y:2021:i:3:p:42-73
    DOI: 10.1111/pbaf.12303
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    References listed on IDEAS

    as
    1. Craig L. Johnson & Martin J. Luby & Tima T. Moldogaziev, 2014. "State and Local Financial Instruments," Books, Edward Elgar Publishing, number 15845.
    2. Min Su & W. Bartley Hildreth, 2018. "Does Financial Slack Reduce Municipal Short†Term Borrowing?," Public Budgeting & Finance, Wiley Blackwell, vol. 38(1), pages 95-113, March.
    3. Gilchrist, Simon & Wei, Bin & Yue, Vivian Z. & Zakrajšek, Egon, 2024. "The Fed takes on corporate credit risk: An analysis of the efficacy of the SMCCF," Journal of Monetary Economics, Elsevier, vol. 146(C).
    4. Ariel Linden, 2015. "Conducting interrupted time-series analysis for single- and multiple-group comparisons," Stata Journal, StataCorp LP, vol. 15(2), pages 480-500, June.
    5. Jongmin Shon & Junghack Kim, 2019. "The impact of revenue diversification on municipal debts: comparing short-term and long-term debt levels," Local Government Studies, Taylor & Francis Journals, vol. 45(2), pages 241-261, March.
    6. Ronald C. Fisher & Robert W. Wassmer, 2014. "The Issuance of State and Local Debt During the United States Great Recession," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(1), pages 113-150, March.
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