Lei Li, Yi Li, Marco Macchiavelli, Xing (Alex) Zhou, 14 July 2020

Liquidity restrictions on investors, like the redemption gates and liquidity fees introduced in the 2016 money market fund (MMF) reform, are meant to improve financial stability during a crisis. However, by comparing the latest outflow episode due to COVID-19 to those in 2008 and 2011, this column finds evidence that these liquidity restrictions might have exacerbated the run on prime MMFs in this episode. Such severe outflows amid frozen short-term funding markets led the Federal Reserve to intervene with the Money Market Mutual Fund Liquidity Facility (MMLF). By providing ‘liquidity of last resort’, the MMLF successfully stopped the run on prime MMFs and gradually stabilised conditions in short-term funding markets.

Giovanna Bua, Peter G Dunne, 26 June 2019

Money market funds are important from a monetary policy perspective because they provide bank-like services and they are active in short-term funding markets. This column examines how recent extreme monetary policies have affected their performance and behaviour. Extreme monetary policy puts money market funds, which do not have access to the ECB’s deposit facility, under pressure by depressing the yields available on the assets they typically hold, leaving them at a competitive disadvantage relative to banks.  This could cause outflows of investment and unintended intermediation between banks and funds. 

Marco Di Maggio, Marcin Kacperczyk, 19 July 2016

The zero lower bound policy for nominal interest rates was implemented to stimulate sluggish economic growth and boost employment. This column explores whether this policy had unintended effects on the money market fund industry. Traditionally enjoying relatively low and safe returns, money market funds could respond to the low interest rate environment by either exiting the market or changing product offerings and accepting higher portfolio risk. The results show evidence of both, and point to an important but neglected channel for monetary policy transmission.


CEPR Policy Research