The Value of Municipal Liquidity during COVID-19: Bond Price Differentials around Lending Eligibility Cutoffs
Please join the NYU Furman Center for a lunchtime presentation on:
The Value of Municipal Liquidity during COVID-19: Bond Price Differentials around Lending Eligibility Cutoffs
with
Ben Hyman
Economist
Federal Reserve Bank of New York
Abstract. We ask whether Federal interventions in municipal debt markets were effective at restoring liquidity for government issuers during COVID-19, and to what extent these actions operated through credit-risk sharing. Focusing on secondary market yields, we first estimate the effect of indirect access to the Federal Reserve Bank’s Municipal Liquidity Facility (MLF) using a regression discontinuity (RD) design around MLF lending eligibility population cutoffs---250,000 for cities, 500,000 for counties. We develop a reduced-form test of credit-risk sharing that separately estimates the RD across differently rated issuers: if Federal facilities directly share default risk, one would expect stronger price spreads among lower rated issuers as they comprise a larger share of marginally-defaulting bonds. If effects are neutral across the ratings distribution, this would instead suggest that access effects primarily operate through liquidity provision. We then benchmark the estimated access effect against any aggregate effects resulting from the totality of Federal interventions, using an asset price decomposition of the overall time series into various measures of aggregate liquidity (such as bid-ask spreads) and credit-risk (such as expected default). Our preliminary results suggest evidence of both liquidity and credit-risk sharing channels; however more work needs to be done to quantify their exact contributions and interpret implications for social efficiency and the real economy.
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About the Presenter:
Ben Hyman is a labor and public finance economist at the Federal Reserve Bank of New York. His primary research uses employer-employee matched data to analyze the effects of diverse social insurance and retraining incentives on workers displaced by trade and automation. He also studies the effects of tax incentives on firm location and investment decisions, and how those choices pass through to local labor market outcomes, as well as municipal bond markets. Prior to joining the New York Fed, he was a postdoctoral fellow at the Becker-Friedman Institute at the University of Chicago. Ben received his Ph.D. in Applied Economics from the Wharton School, University of Pennsylvania, in May 2018, and holds an Masters in Urban and Regional Planning from MIT.
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