Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2019-01-11
Number: 19-002/V
Author-Name: Makoto (M.) Watanabe
Author-Email: makoto.wtnb@gmail.com
Author-Workplace-Name: VU Amsterdam
Author-Name: Tarishi Matsuoka
Author-Email: tarishi727@gmail.com
Author-Workplace-Name: Tokyo Metropolitan University
Title: Banking Panics and the Lender of Last Resort in a Monetary Economy
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.
Classification-JEL: E40
Keywords: Monetary Equilibrium; Banking Panic; Moral Hazard; Lender of Last Resort
File-URL: https://papers.tinbergen.nl/19002.pdf
File-Format: application/pdf
File-Size: 476132 bytes
Handle: RePEc:tin:wpaper:20190002