Central Bank Price Discrimination and Financial Stability

Kilian Rieder

No 16490, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper exploits a natural experiment to evaluate price discrimination by the central bank as a financial stability tool. In 1920, four U.S. Federal Reserve districts imposed a convex tariff on over-extended banks' central bank borrowing to halt a credit boom. To identify the policy's treatment effects, I leverage new micro data and draw on border discontinuities across other districts that raised interest rates indiscriminately for all banks. I find that price discrimination led to a significant relative reduction in lending, a more even distribution of credit and central bank borrowing across banks, and higher bank survival rates.

Keywords: Bank lending; Credit boom; Federal Reserve; Financial stability; Monetary policy; Price discrimination; Recession of 1920/1921 (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 N12 N22 (search for similar items in EconPapers)
Date: 2021-08
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