IDEAS home Printed from https://ideas.repec.org/p/fip/fednsr/93082.html
   My bibliography  Save this paper

COVID Response: The Municipal Liquidity Facility

Author

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.”
    as

    Download full text from publisher

    File URL: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr985.pdf
    File Function: Full text
    Download Restriction: no

    File URL: https://www.newyorkfed.org/research/staff_reports/sr985.html
    File Function: Summary
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Richard C. Green & Dan Li & Norman Schürhoff, 2010. "Price Discovery in Illiquid Markets: Do Financial Asset Prices Rise Faster Than They Fall?," Journal of Finance, American Finance Association, vol. 65(5), pages 1669-1702, October.
    2. Bruce, Donald & Fox, William F., 2000. "E-Commerce in the Context of Declining State Sales Tax Bases," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 1373-90, December.
    3. Bruce, Donald & Fox, William F., 2000. "E-Commerce in the Context of Declining State Sales Tax Bases," National Tax Journal, National Tax Association;National Tax Journal, vol. 53(4), pages 1373-1390, December.
    4. Michael D. Bordo & John V. Duca, 2021. "How the New Fed Municipal Bond Facility Capped Muni-Treasury Yield Spreads in the COVID-19 Recession," Working Papers 2101, Federal Reserve Bank of Dallas.
    5. Boyarchenko, Nina & Kovner, Anna & Shachar, Or, 2020. "It’s what you say and what you buy: A holistic evaluation of the Corporate Credit Facilities," CEPR Discussion Papers 15432, C.E.P.R. Discussion Papers.
    6. Boyarchenko, Nina & Kovner, Anna & Shachar, Or, 2022. "It’s what you say and what you buy: A holistic evaluation of the corporate credit facilities," Journal of Financial Economics, Elsevier, vol. 144(3), pages 695-731.
    7. Andrew F. Haughwout & Benjamin Hyman & Or Shachar, 2021. "The Option Value of Municipal Liquidity: Evidence from Federal Lending Cutoffs during COVID-19," Staff Reports 988, Federal Reserve Bank of New York.
    8. Gao, Pengjie & Lee, Chang & Murphy, Dermot, 2019. "Municipal borrowing costs and state policies for distressed municipalities," Journal of Financial Economics, Elsevier, vol. 132(2), pages 404-426.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andrew F. Haughwout & Benjamin Hyman & Or Shachar, 2022. "The Municipal Liquidity Facility," Economic Policy Review, Federal Reserve Bank of New York, vol. 28(1), July.
    2. Andrew F. Haughwout & Benjamin Hyman & Or Shachar, 2021. "The Option Value of Municipal Liquidity: Evidence from Federal Lending Cutoffs during COVID-19," Staff Reports 988, Federal Reserve Bank of New York.
    3. W. Blake Marsh & Padma Sharma, 2021. "Government Loan Guarantees during a Crisis: The Effect of the PPP on Bank Lending and Profitability," Research Working Paper RWP 21-03, Federal Reserve Bank of Kansas City.
    4. Ivanov, Ivan T. & Zimmermann, Tom & Heinrich, Nathan W., 2022. "Limits of disclosure regulation in the municipal bond market," CFR Working Papers 22-05, University of Cologne, Centre for Financial Research (CFR).
    5. Donald Bruce & William Fox & Matthew Murray, 2003. "To Tax Or Not To Tax? The Case Of Electronic Commerce," Contemporary Economic Policy, Western Economic Association International, vol. 21(1), pages 25-40, January.
    6. Propheter Geoffrey, 2015. "Political Institutions and State Sales Tax Base Erosion," Statistics, Politics and Policy, De Gruyter, vol. 6(1-2), pages 1-17, December.
    7. Cimon, David A. & Walton, Adrian, 2024. "Central bank liquidity facilities and market making," Journal of Banking & Finance, Elsevier, vol. 162(C).
    8. David R. Agrawal & Aline Bütikofer, 2022. "Public finance in the era of the COVID-19 crisis," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(6), pages 1349-1372, December.
    9. He, Zhiguo & Nagel, Stefan & Song, Zhaogang, 2022. "Treasury inconvenience yields during the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 143(1), pages 57-79.
    10. O'Hara, Maureen & Zhou, Xing (Alex), 2021. "Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 crisis," Journal of Financial Economics, Elsevier, vol. 142(1), pages 46-68.
    11. Valentin Haddad & Alan Moreira & Tyler Muir, 2021. "When Selling Becomes Viral: Disruptions in Debt Markets in the COVID-19 Crisis and the Fed’s Response [Funding value adjustments]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5309-5351.
    12. Nina Boyarchenko & Richard K. Crump & Anna Kovner & Or Shachar, 2021. "Corporate Bond Market Distress," Staff Reports 957, Federal Reserve Bank of New York.
    13. John J Shim & Karamfil Todorov, 2021. "ETFs, illiquid assets, and fire sales," BIS Working Papers 975, Bank for International Settlements.
    14. 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).
    15. Bruno Albuquerque & Georgi Krustev, 2018. "Debt Overhang and Deleveraging in the US Household Sector: Gauging the Impact on Consumption," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 64(2), pages 459-481, June.
    16. Agrawal, David R. & Shybalkina, Iuliia, 2023. "Online shopping can redistribute local tax revenue from urban to rural America," Journal of Public Economics, Elsevier, vol. 219(C).
    17. Robert Tannenwald, 2001. "Are state and local revenue systems becoming obsolete?," New England Economic Review, Federal Reserve Bank of Boston, pages 27-43.
    18. Metrick, Andrew, 2022. "Market Support Programs: COVID-19 Crisis," Journal of Financial Crises, Yale Program on Financial Stability (YPFS), vol. 4(2), pages 179-219, April.
    19. Mahyar Kargar & Benjamin Lester & David Lindsay & Shuo Liu & Pierre-Olivier Weill & Diego Zúñiga, 2021. "Corporate Bond Liquidity during the COVID-19 Crisis [The day coronavirus nearly broke the financial markets]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5352-5401.
    20. Yoshimi Adachi & Hikaru Ogawa, 2022. "Cross-Border Shopping, E-Commerce, and Consumption Tax Revenues in Japan," CIRJE F-Series CIRJE-F-1204, CIRJE, Faculty of Economics, University of Tokyo.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:93082. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Gabriella Bucciarelli (email available below). General contact details of provider: https://edirc.repec.org/data/frbnyus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.