Discussion Paper

The Federal Reserve's Liquidity Backstops to the Municipal Bond Market during the COVID-19 Pandemic


Abstract: The COVID-19 pandemic has caused tremendous hardship all over the world. In response, the Federal Reserve has moved quickly and aggressively to support the economy in the United States. In this article, we present some initial evidence for the effectiveness of some of the facilities in calming the municipal bond market, particularly the short-term variable-rate demand obligation (VRDO) market. We discuss the important role of liquidity backstops in mitigating runs and stabilizing financial markets in general based on insights from our study on the runs on VRDO and auction-rate securities (ARS) in 2008 during the financial crisis.

Keywords: municipal bond; COVID-19 pandemic; liquidity backstops;

JEL Classification: G10; G20; G21;

https://doi.org/10.29338/ph2020-05

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Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: Policy Hub

Publication Date: 2020-05-28

Number: 2020-5

Pages: 10