The First Line of Defense: The Discount Window during the Early Stages of the Financial Crisis

Elizabeth Klee

International Journal of Central Banking, 2021, vol. 17, issue 1, 143-190

Abstract: Differences in stigma of borrowing from the discount window across banks caused federal funds rates to rise early in the 2007–09 financial crisis, even as the spread between the discount rate and the target rate narrowed. Low-stigma banks went to the discount window, leaving only high-stigma banks in the market, creating a separating equilibrium. A simple theoretical model illustrates this point, and its implications are evaluated using an empirical selection model. The results suggest the selection effect became stronger as the crisis intensified pre-Lehman, but faded once reserves ballooned.

JEL-codes: E52 E58 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Working Paper: The first line of defense: the discount window during the early stages of the financial crisis (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2021:q:1:a:5

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