Lender of Last Resort and Moral Hazard

Charles Goodhart and Rosa Lastra

No 18041, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper we revisit the Lender of Last Resort (LOLR) function of the central bank and the associated moral hazard incentives. We argue that, from an economic perspective, the strict application of penalties to the operation of LOLR actions can make that instrument unworkable. Instead, we suggest that both penalties and publication should only be applied after such LOLR had been in place for a time. Normative frameworks ought to be adjusted in this regard.

Keywords: Lender-of-last-resort; Illiquidity; Insolvency; Stigma (search for similar items in EconPapers)
JEL-codes: E5 E58 E59 G18 (search for similar items in EconPapers)
Date: 2023-03
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