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States and localities are relied upon to implement macroeconomic stabilization policies and ensure
service delivery in times of crisis. In April 2020, the introduction of the Municipal Liquidity Facility
(MLF) added an emergency lending instrument to the policy arsenal guaranteeing liquidity but at a
price. Using a regression discontinuity design that exploits MLF lending eligibility population cutoffs,
we find that the MLF contributed to the easing of liquidity pressures and reduced perceived credit risk
for municipal borrowers. Low-rated issuers experienced yields reductions of at least 26 bps. We also
provide suggestive evidence that these liquidity effects translated into employment gains.
