Micro-aspects of Monetary Policy: Lender of Last Resort and Selection of Banks in Pre-war Japan (Published in "Explorations in Economic History", October 2007, v. 44, iss. 4, pp. 657-79. )

Tetsuji Okazaki
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Tetsuji Okazaki: Faculty of Economics, University of Tokyo

No CARF-F-084, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This paper explores how the Bank of Japan (BOJ) dealt with the trade-off between stability of the financial system and the moral hazard of banks in pre-war Japan. The BOJ concentrated Lender of Last Resort (LLR) loans with those banks that had an established transaction relationship with the BOJ. At the same time, the BOJ carefully selected its transaction counterparts, and did not hesitate to end the relationship if the performance of a counterpart declined. Further, the BOJ was selective in providing LLR loans. Through this policy, the BOJ could avoid the moral hazard that the LLR policy might otherwise have incurred.

Pages: 49 pages
Date: 2006-11
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Persistent link: https://EconPapers.repec.org/RePEc:cfi:fseres:cf084

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