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Financial Market Liquidity and the Lender of Last Resort

Author

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  • Ewerhart, C.
  • Valla, N.

Abstract

It has been argued in the literature that emergency liquidity injections should be conducted preferably in the form of open market operations. As we show in the present paper, this is not necessarily the case when liquidity may be alternatively used for speculative purposes during the crisis. In such a situation, non-discriminating operations may attract unfunded market participants that divert funding resources away from its best uses in the financial sector. As a consequence, targeted liquidity assistance may become strictly superior. The analysis might have a bearing on recent developments in the context of the subprime crisis.

Suggested Citation

  • Ewerhart, C. & Valla, N., 2007. "Financial Market Liquidity and the Lender of Last Resort," Working papers 178, Banque de France.
    • Handle: RePEc:bfr:banfra:178
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    References listed on IDEAS

    as
    1. Goodhart, Charles A.E. & Huang, Haizhou, 2005. "The lender of last resort," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1059-1082, May.
    2. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    3. Sanford J. Grossman & Merton H. Miller, 1988. "Liquidity and Market Structure," NBER Working Papers 2641, National Bureau of Economic Research, Inc.
    4. Garcia, Gillian, 1989. "The Lender of Last Resort in the Wake of the Crash," American Economic Review, American Economic Association, vol. 79(2), pages 151-155, May.
    5. Repullo, Rafael, 2000. "Who Should Act as Lender of Last Resort? An Incomplete Contracts Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 580-605, August.
    6. Antonio E. Bernardo & Ivo Welch, 2004. "Liquidity and Financial Market Runs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 135-158.
    7. repec:bla:jecsur:v:20:y:2006:i:3:p:459-482 is not listed on IDEAS
    8. Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 804-824, November.
    9. Marvin Goodfriend & Robert G. King, 1988. "Financial deregulation, monetary policy, and central banking," Economic Review, Federal Reserve Bank of Richmond, vol. 74(May), pages 3-22.
    10. repec:bla:jfinan:v:43:y:1988:i:3:p:617-37 is not listed on IDEAS
    11. Xavier Freixas & Jean-Charles Rochet & Bruno M. Parigi, 2004. "The Lender of Last Resort: A Twenty-First Century Approach," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1085-1115, December.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Pavla Vodová, 2015. "To Lend or to Borrow on the Interbank Market: What Matters for Commercial Banks in the Visegrad Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2015(6), pages 662-677.
    2. Sekoni, Abiola, 2015. "Germane Issues and Physiognomies of Bank Liquidity Risk," MPRA Paper 67399, University Library of Munich, Germany.
    3. Nikolaou, Kleopatra, 2009. "Liquidity (risk) concepts: definitions and interactions," Working Paper Series 1008, European Central Bank.
    4. repec:prg:jnlpep:v:preprint:id:529 is not listed on IDEAS

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    More about this item

    Keywords

    Liquidity ; Financial markets ; Lender of last resort.;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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