A Monetary Equilibrium with the Lender of Last Resort

Tarishi Matsuoka and Makoto Watanabe

No 10439, CESifo Working Paper Series from CESifo

Abstract: This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of a bank’s monetary reserves (a liquidity crisis) occurs endogenously. We show that discount window lending by the LLR is welfare-improving but reduces banks’ ex-ante incentive to hold monetary reserves, which increases the probability of a liquidity crisis, and can cause moral hazard in capital investment. We also analyze the combined effects of monetary and extensive LLR policies, such as a nominal interest rate, a lending rate, and a haircut.

Keywords: monetary equilibrium; liquidity crisis; lender of last resort; moral hazard (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mon
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Working Paper: A Monetary Equilibrium with the Lender of Last Resort (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_10439

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