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The First Line of Defense: The Discount Window during the Early Stages of the Financial Crisis

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  • Elizabeth Klee

    (Board of Governors of the Federal Reserve System)

Abstract

Differences in stigma of borrowing from the discount window across banks caused federal funds rates to rise early in the 2007–09 financial crisis, even as the spread between the discount rate and the target rate narrowed. Low-stigma banks went to the discount window, leaving only high-stigma banks in the market, creating a separating equilibrium. A simple theoretical model illustrates this point, and its implications are evaluated using an empirical selection model. The results suggest the selection effect became stronger as the crisis intensified pre-Lehman, but faded once reserves ballooned.

Suggested Citation

  • Elizabeth Klee, 2021. "The First Line of Defense: The Discount Window during the Early Stages of the Financial Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 143-190, March.
    • Handle: RePEc:ijc:ijcjou:y:2021:q:1:a:5
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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