EconPapers    
Economics at your fingertips  
 

Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort

Gaetano Antinolfi () and Elisabeth Huybens
Additional contact information
Elisabeth Huybens: World Bank

No 1156, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: We study an economy where agents are subject to liquidity demand shocks, and banks arise endogenously to insure consumers against these shocks. In this environment we evaluate the desirability of a lender of last resort who can provide liquidity loans to banks in distress. In the absence of a lender of last resort, the economy has a unique, stationary equilibrium. The introduction of unlimited and costless lender of last resort services allows the economy to achieve a steady state allocation that is pareto optimal. However, this economy also displays a continuum of hyperinflationary equilibria. We then explore restrictions on the provision of lender of last resort services that rule out such monetary instability while preserving some of the efficiency obtained by unrestricted lender of last resort services. When the lender of last resort charges an interest rate on liquidity loans, the economy has a unique steady state equilibrium, and when the interest rate charged is high enough, no hyperinflationary equilibria arise. Finally, when the lender of last resort faces an upper bound on loanable funds, there is again a unique long-run equilibrium, and when the upper bound on loanable funds is small enough, hyperinflationary equilibria are ruled out.

Date: 2000-08-01
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://fmwww.bc.edu/RePEc/es2000/1156.pdf main text (application/pdf)

Related works:
Journal Article: Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort (2001) Downloads
Working Paper: Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort (2000) Downloads
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:ecm:wc2000:1156

Access Statistics for this paper

More papers in Econometric Society World Congress 2000 Contributed Papers from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().

 
Page updated 2021-03-28
Handle: RePEc:ecm:wc2000:1156