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Banking Panics and the Lender of Last Resort in a Monetary Economy

Tarishi Matsuoka and Makoto Watanabe ()

No 7451, CESifo Working Paper Series from CESifo Group Munich

Abstract: This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank’s monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks’ ex ante incentive to hold reserves, which increases the probability of a panic, and causes moral hazard in asset investments. We also examine the combined effect of other related policies such as a penalty in lending rate, liquidity requirements and constructive ambiguity.

Keywords: monetary equilibrium; banking panic; moral hazard; lender of last resort (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2019
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