Central banks and financial crises

Willem Buiter

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The paper draws lessons from the experience of the past year for the conduct of central banks in the pursuit of macroeconomic and financial stability. Macroeconomic stability is defined as either price stability or as price stability and sustainable output or employment growth. Financial stability refers to (1) the absence of asset price bubbles, (2) the prevention or mitigation of systemically significant funding illiquidity and market illiquidity and (3) the prevention of insolvency of systemically important financial institutions. The performance of the Fed, the ECB and the Bank of England is evaluated in terms of these criteria. The Fed is judged to have done worst both as regards macroeconomic stability and as regards one of the two time dimensions of financial stability: minimizing the likelihood and severity of future financial crises. As regards ‘putting out fires’ (dealing with the immediate crisis), the Bank of England gets the wooden spoon for its early failure to perform the lender of last resort and market maker of last resort roles.

Keywords: Lender of last resort; Market maker of last resort; Moral hazard; Regulatory capture; Quasi-fiscal subsidies (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 E58 E65 F41 G12 G18 G28 (search for similar items in EconPapers)
Pages: 152 pages
Date: 2008-09-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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http://eprints.lse.ac.uk/24438/ Open access version. (application/pdf)

Related works:
Journal Article: Central banks and financial crises (2008)
Working Paper: Central banks and financial crises (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:24438

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