Discount Window Policy, Banking Crises, and Indeterminacy of Equilibrium
Gaetano Antinolfi () and
Todd Keister ()
No 305, Working Papers from Centro de Investigacion Economica, ITAM
We examine optimal discount window policy in an economy with a linear investment technology and aggregate liquidity shocks. Unrestricted lending at the discount window prevents large shocks from causing banking crises, but leads to indeterminacy of stationary equilibrium. We show how a policy of offering discount-window loans at an above-market interest rate generates a unique stationary monetary equilibrium. Under such a policy, banking crises occur with positive probability in equilibrium, but a proper choice of interest rate can make the welfare loss due to these crises arbitrarily small. We then modify the model by introducing diminishing returns to investment and show that, in this case, the optimal policy may eliminate banking crises entirely.
Pages: 29 pages
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed
Downloads: (external link)
http://ftp.itam.mx/pub/academico/inves/keister/03-05.pdf First version, 2003 (application/pdf)
Journal Article: DISCOUNT WINDOW POLICY, BANKING CRISES, AND INDETERMINACY OF EQUILIBRIUM (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cie:wpaper:0305
Access Statistics for this paper
More papers in Working Papers from Centro de Investigacion Economica, ITAM Contact information at EDIRC.
Bibliographic data for series maintained by Diego Dominguez ().