Safe Assets and Financial Fragility

Using the 2013 debt limit episode in the Unites States and the introduction of the Federal Reserve’s Overnight Reverse Repurchase (ONRRP) facility as a quasi-natural experiment, we document novel financial stability benefits from the public provision of safe assets. Specifically, we show that access to safe assets—the ONRRP—attenuates investor redemptions from money market funds and allows these funds to maintain their lending to corporations in times of stress. We then rationalize our empirical findings with a global-game model of investor redemptions from money funds that finance corporate borrowers and hold safe assets