Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?

Jean Rochet and Xavier Vives

No 26264, Discussion Paper Series from Hamburg Institute of International Economics

Abstract: The classical doctrine of the Lender of Last Resort, elaborated by Thornton (1802) and Bagehot (1873), asserts that the Central Bank should lend to "illiquid but solvent" banks under certain conditions. Several authors have argued that this view is now obsolete: when interbank markets are efficient, a solvent bank cannot be illiquid. This paper provides a possible theoretical foundation for rescuing Bagehot's view. Our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs. We build a model of banks' liquidity crises that possesses a unique Bayesian equilibrium. In this equilibrium, there is a positive probability that a solvent bank cannot find liquidity assistance in the market. We derive policy implications about banking regulation (solvency and liquidity ratios) and interventions of the Lender of Last Resort as well as on the disclosure policy of the Central Bank.

Keywords: Financial; Economics (search for similar items in EconPapers)
Pages: 47
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

Downloads: (external link)
https://ageconsearch.umn.edu/record/26264/files/dp020184.pdf (application/pdf)

Related works:
Journal Article: Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All? (2004)
Working Paper: Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All? (2004)
Working Paper: Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All? (2002)
Working Paper: Coordination failures and the lender of last resort: was Bagehot right after all? (2002)
Working Paper: Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All? (2002)
Working Paper: Coordination failures and the lender of last resort: Was Bagehot right after all? (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ags:hwwadp:26264

DOI: 10.22004/ag.econ.26264

Access Statistics for this paper

More papers in Discussion Paper Series from Hamburg Institute of International Economics Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search ().