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Central Bank Crisis Interventions: A Review of the Recent Literature on Potential Costs

Patrick Aldridge, David Cimon and Rishi Vala

No 2023-30, Discussion Papers from Bank of Canada

Abstract: Central banks may engage in large-scale lending and asset purchases to stabilize financial markets and implement monetary policy during crises. The ability of these actions to restore financial market functioning is well documented; however, they come with costs. We provide a literature review of the costs associated with these central bank actions, without commenting on the net benefits they provide. We find support for the premise that crisis actions may negatively impact market liquidity, distort asset prices, create conflicts between monetary and financial stability objectives and increase rent seeking and unproductive uses of the liquidity provided by the central bank. We discuss measures that may mitigate the negative impacts of crisis actions.

Keywords: Central bank research; Financial institutions; Financial markets; Financial stability, Lender of last resort (search for similar items in EconPapers)
JEL-codes: E5 E58 G10 G20 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2023-12
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mon and nep-pay
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