The European Central Bank: Lender of Last Resort in the Government Bond Markets?

Paul De Grauwe

No 3569, CESifo Working Paper Series from CESifo

Abstract: The sovereign debt crisis has made it clear that central banking is more than keeping inflation low. Central banks are also responsible for financial stability. An essential tool in maintaining financial stability is provided by the capacity of the central bank to be the lender of last resort in the banking system. In this paper I argue that the ECB should also be the lender of last resort in the government bond markets of the monetary union, very much like the central banks in countries that issue debt in their own currencies are. This is necessary to prevent countries from being pushed into bad equilibria by self-fulfilling fears of liquidity crises in a monetary union. I also survey the different arguments that have been formulated by opponents of the view that the ECB should be the lender of last resort in the government bond markets.

Keywords: lender of last resort; European Central Bank; moral hazard; inflation (search for similar items in EconPapers)
JEL-codes: F33 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (75)

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Related works:
Journal Article: The European Central Bank as Lender of Last Resort in the Government Bond Markets (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_3569

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