Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/205292 
Year of Publication: 
2019
Series/Report no.: 
Tinbergen Institute Discussion Paper No. TI 2019-002/V
Publisher: 
Tinbergen Institute, Amsterdam and Rotterdam
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.
Subjects: 
Monetary Equilibrium
Banking Panic
Moral Hazard
Lender of Last Resort
JEL: 
E40
Document Type: 
Working Paper

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