Banking Panics and the Lender of Last Resort in a Monetary Economy

Makoto Watanabe and Tarishi Matsuoka

No 19-002/V, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank’s monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks’ ex ante incentive to hold reserves, which increases the probability of a panic, and causes moral hazard in asset investments. We also examine the combined effect of other related policies such as a penalty in lending rate, liquidity requirements, and constructive ambiguity.

Keywords: Monetary Equilibrium; Banking Panic; Moral Hazard; Lender of Last Resort (search for similar items in EconPapers)
JEL-codes: E40 (search for similar items in EconPapers)
Date: 2019-01-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Banking Panics and the Lender of Last Resort in a Monetary Economy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20190002

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