Banking Panics and the Lender of Last Resort in a Monetary Economy

Arbeitspapier

This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank’s monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks’ ex ante incentive to hold reserves, which increases the probability of a panic, and causes moral hazard in asset investments. We also examine the combined effect of other related policies such as a penalty in lending rate, liquidity requirements, and constructive ambiguity.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Tinbergen Institute Discussion Paper ; No. TI 2019-002/V

Classification and Topics

• Classification: Wirtschaft ; Money and Interest Rates: General
• Subject: Monetary Equilibrium ; Banking Panic ; Moral Hazard ; Lender of Last Resort

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Watanabe, Makoto ; Matsuoka, Tarishi
• Event: Veröffentlichung
• (who): Tinbergen Institute
• (where): Amsterdam and Rotterdam
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/205292
• Last update: 10.03.2025, 11:45 AM CET