About this item:

49 Views | 29 Downloads

Author Notes:

Correspondence: Bin Wei

or helpful comments and suggestions, we thank Linda Allen, Markus Brunnermeier, Jean-Edouard Colliard, Phil Dybvig, Itay Goldstein, Mark Fisher, Thierry Foucault, Song Han, Zhiguo He, B. Ravikumar (the editor), William Roberds, Hyun Song Shin, Jeremy Stein, Gustavo Suarez, Luke Taylor, Paula Tkac,

Stephane Verani, Larry Wall, Wei Xiong, two anonymous referees, and seminar participants at the Atlanta Fed, the Dallas Fed, Federal Reserve Board, IMF, University of Texas at Dallas, Tsinghua University, Wuhan University, SWUFE,

2014 American Finance Association meetings, 2013 Society for Economic Dynamics meetings, 2014 All-Georgia Finance conference, 10th Central Bank Workshop, the 2014 Computing in Economics and Finance (CEF) conference.


Research Funding:

None declared


  • liquidity backstop
  • debt run
  • lender of last resort

Liquidity backstops and dynamic debt runs


Journal Title:

Journal of Economic Dynamics & Control


Volume 116


Type of Work:

Article | Final Publisher PDF


Liquidity backstops can mitigate runs. In this paper we develop a dynamic model of debt runs based on He and Xiong (2012) to identify, both conceptually and quantitatively, the value of a liquidity backstop for its run-mitigating role. For the purpose of identification, we focus on the municipal bond markets for variable rate demand obligations and auction rate securities. Based on the run episodes in these markets during the financial crisis of 2007-09 and the calibrated model, we find that the value of a liquidity backstop is about 14.5 basis points per annum. Our findings have important policy implications regarding the effectiveness of liquidity backstops in ameliorating problems of financial instability.

Copyright information:

© 2020 Published by Elsevier B.V.

This is an Open Access work distributed under the terms of the Creative Commons Attribution 4.0 International License (https://creativecommons.org/licenses/by/4.0/).
Export to EndNote