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Rethinking the Lender of Last Resort: New Evidence on the Stabilization of Money Markets Before the Federal Reserve

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  • Fohlin, Caroline

Abstract

Short-term funding markets play a vital role in financial stability. Frequent liquidity shocks caused severe interest rate instability during financial crises historically; a problem commonly thought solved by the creation of the Federal Reserve (Fed) in 1913-4. On the contrary, this paper provides novel evidence that interest rates stabilized six years earlier, with the introduction of federal legislation for a national lender of last resort mechanism in January 1908. The results show that creation of the Fed generated little additional impact on funding market rates or on short-term credit spreads. Moreover, the newly-founded Fed did not succeed in its efforts to shift banks away from overnight lending in the stock market as the market boomed after World War I.

Suggested Citation

  • Fohlin, Caroline, 2024. "Rethinking the Lender of Last Resort: New Evidence on the Stabilization of Money Markets Before the Federal Reserve," CEPR Discussion Papers 19077, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19077
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    More about this item

    Keywords

    Federal Reserve; Lender of last resort;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G1 - Financial Economics - - General Financial Markets
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations
    • N2 - Economic History - - Financial Markets and Institutions

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