Optimal lender of last resort policy in different financial systems

Falko Fecht and Marcel Tyrell

No 2004,39, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: In a framework closely related to Diamond and Rajan (2001) we characterize different financial systems and analyze the welfare implications of different LOLR-policies in these financial systems. We show that in a bank-dominated financial system it is less likely that a LOLR-policy that follows the Bagehot rules is preferable. In financial systems with rather illiquid assets a discretionary individual liquidity assistance might be welfare improving, while in market-based financial systems, with rather liquid assets in the banks' balance sheets, emergency liquidity assistance provided freely to the market at a penalty rate is likely to be efficient. Thus, a "one size fits all"-approach that does not take the differences of financial systems into account is misguiding.

Keywords: Financial Crises; Lender of Last Resort; Comparing Financial Systems (search for similar items in EconPapers)
JEL-codes: D52 E44 E52 E58 G21 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Optimal Lender of Last Resort Policy in Different Financial Systems (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:2917

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