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The European Central Bank: Lender of Last Resort in the Government Bond Markets?

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  • Paul De Grauwe

Abstract

The sovereign debt crisis has made it clear that central banking is more than keeping inflation low. Central banks are also responsible for financial stability. An essential tool in maintaining financial stability is provided by the capacity of the central bank to be the lender of last resort in the banking system. In this paper I argue that the ECB should also be the lender of last resort in the government bond markets of the monetary union, very much like the central banks in countries that issue debt in their own currencies are. This is necessary to prevent countries from being pushed into bad equilibria by self-fulfilling fears of liquidity crises in a monetary union. I also survey the different arguments that have been formulated by opponents of the view that the ECB should be the lender of last resort in the government bond markets.

Suggested Citation

  • Paul De Grauwe, 2011. "The European Central Bank: Lender of Last Resort in the Government Bond Markets?," CESifo Working Paper Series 3569, CESifo.
    • Handle: RePEc:ces:ceswps:_3569
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    References listed on IDEAS

    as
    1. Paul De Grauwe, 2014. "The Governance of a Fragile Eurozone," World Scientific Book Chapters, in: Exchange Rates and Global Financial Policies, chapter 12, pages 297-320, World Scientific Publishing Co. Pte. Ltd..
    2. Belke, Ansgar, 2010. "How Much Fiscal Backing Must the ECB Have? – The Euro Area is not the Philippines," Ruhr Economic Papers 184, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    3. Calvo, Guillermo A, 1988. "Servicing the Public Debt: The Role of Expectations," American Economic Review, American Economic Association, vol. 78(4), pages 647-661, September.
    4. repec:cii:cepiei:2010-4ta is not listed on IDEAS
    5. Ansgar Belke & Thorsten Polleit, 2010. "How much fiscal backing must the ECB have? The euro area is not (yet) the Philippines," International Economics, CEPII research center, issue 124, pages 5-30.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    lender of last resort; European Central Bank; moral hazard; inflation;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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