Rethinking the Lender of Last Resort: New Evidence on the Stabilization of Money Markets Before the Federal Reserve

Caroline Fohlin

No 19077, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Short-term funding markets play a vital role in financial stability. Frequent liquidity shocks caused severe interest rate instability during financial crises historically; a problem commonly thought solved by the creation of the Federal Reserve (Fed) in 1913-4. On the contrary, this paper provides novel evidence that interest rates stabilized six years earlier, with the introduction of federal legislation for a national lender of last resort mechanism in January 1908. The results show that creation of the Fed generated little additional impact on funding market rates or on short-term credit spreads. Moreover, the newly-founded Fed did not succeed in its efforts to shift banks away from overnight lending in the stock market as the market boomed after World War I.

Keywords: Federal Reserve; Lender of last resort (search for similar items in EconPapers)
JEL-codes: E4 E5 G01 G1 N1 N2 (search for similar items in EconPapers)
Date: 2024-05
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP19077 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:19077

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP19077

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().