The lender of last resort: A 21st Century approach

Xavier Freixas (), Bruno M. Parigi and Jean Rochet

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: The object of this paper is to analyze rigorously the role of a Lender of Last Resort by providing a framework where the distinction between insolvency and illiquidity is not clearly cut. Determining the optimal Lender of Last Resort policy requires a careful modeling of the structure of the interbank market and of the closure policy. In our set up, the results depend upon the existence of moral hazard. If the main source of moral hazard is the banks’ lack of incentives to screen loans, then the Lender of Last Resort may have to intervene to improve the e¢ciency of an unsecured interbank market; if instead, the main source of moral hazard is loans monitoring, then the interbank market should be secured and the Lender of Last Resort should never intervene.

Keywords: Lender of Last Resort; interbank market; liquidity (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Related works:
Working Paper: The lender of last resort: a 21st century approach (2003)
Working Paper: The Lender of Last Resort: A 21th Century Approach (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:708

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