What Institutional Structure for the Lender of Last Resort?

Itai Agur ()

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: This paper develops a game theory model to analyze the optimal structure of the Lender of Last Resort in Europe. When depositors are imperfectly informed, the indifference to international transmission displayed by national authorities has value. A centralized authority, because it internalizes externalities, faces a pooling equilibrium. It cannot effectively signal the motivation behind its interventions. This leads to unnecessary depositor scares. The first-best is achieved by delegation: the central authority decides when to retain control and when to delegate to the national authorities. Central coordination dominates pure centralization.Â

Keywords: Lender of Last Resort; Bailout; Delegation; Contagion; Centralization (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba, nep-cta and nep-mon
Date: 2009-02
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Persistent link: http://EconPapers.repec.org/RePEc:dnb:dnbwpp:200

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