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COVID Response: The Municipal Liquidity Facility

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Abstract

At the onset of the COVID-19 pandemic, state and local governments were among the sectors expected to experience the most severe distress. The combination of a sharply deteriorating revenue picture, a pressing need for additional expenditures, delays in the receipt of substantial taxes owed, and an inability to access the financial markets raised serious concerns among many observers about the ability of state and local governments to meet their public service delivery responsibilities. In April 2020, the Federal Reserve announced the establishment of the Municipal Liquidity Facility (MLF) to help municipalities manage the cash flow challenges that the pandemic produced. The MLF ultimately offered three-year loans at penalty rates to a set of eligible municipal issuers that included states, large cities and counties, and a number of revenue bond issuers. Research suggests that the MLF, in spite of lending to only the State of Illinois and the Metropolitan Transportation Authority, contributed to a healing in the municipal securities market as a whole. Effects on real economic outcomes like employment in the sector are harder to attribute to facility.

Suggested Citation

  • Andrew F. Haughwout & Benjamin Hyman & Or Shachar, 2021. "COVID Response: The Municipal Liquidity Facility," Staff Reports 985, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:93082
    Note: This paper was prepared for an upcoming issue of the Economic Policy Review and a related New York Fed conference, “Implications of Federal Reserve Actions in Response to the COVID-19 Pandemic.”
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    References listed on IDEAS

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    More about this item

    Keywords

    municipal debt; state and local governments; COVID-19; Federal Reserve lending facilities;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing

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