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Central banks and financial stability: rediscovering the lender-of-last-resort practice in a finance economy

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  • Laurent Le Maux
  • Laurence Scialom

Abstract

The purpose of our paper is to assess whether central banks have adopted new practices of lending in last resort during the 2007–09 financial crisis. We compare the current period with the classical period, both featured by a finance economy with developed financial markets and unregulated institutions. Beyond the differences determined by the monetary regime and concerning the central bank rate policy, we find similarities such as the enlargements of the set of counterparties and eligible collateral assets. Since the credit system is based on financial markets and innovations, central banks have a wider involvement that goes beyond a narrow conception of the lender of last resort that prevailed under a regulated banking system. We conclude that the historical roots of financial stabilisation by central banks in a finance economy have just been rediscovered, and that the functions of lender of last resort and market maker of last resort may be analytically integrated. Copyright , Oxford University Press.

Suggested Citation

  • Laurent Le Maux & Laurence Scialom, 2013. "Central banks and financial stability: rediscovering the lender-of-last-resort practice in a finance economy," Cambridge Journal of Economics, Cambridge Political Economy Society, vol. 37(1), pages 1-16.
    • Handle: RePEc:oup:cambje:v:37:y:2013:i:1:p:1-16
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    3. Anne-Marie Rieu-Foucault, 2018. "Les interventions de crise de la FED et de la BCE diffèrent-elles ?," Working Papers hal-04141702, HAL.
    4. Jakob Vestergaard & Daniela Gabor, 2021. "Central Banks Caught Between Market Liquidity and Fiscal Disciplining: A Money View Perspective on Collateral Policy," Working Papers Series inetwp170, Institute for New Economic Thinking.

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