Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/279188 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10439
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of a bank's monetary reserves (a liquidity crisis) occurs endogenously. We show that discount window lending by the LLR is welfare-improving but reduces banks' ex-ante incentive to hold monetary reserves, which increases the probability of a liquidity crisis, and can cause moral hazard in capital investment. We also analyze the combined effects of monetary and extensive LLR policies, such as a nominal interest rate, a lending rate, and a haircut.
Subjects: 
monetary equilibrium
liquidity crisis
lender of last resort
moral hazard
JEL: 
E40
Document Type: 
Working Paper
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