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Reconciling Bagehot with the Fed's response to Sept. 11

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  • Antoine Martin

Abstract

Bagehot (1873) states that in order to prevent bank panics a central bank should provide liquidity to the market at a \"very high rate of interest\". This seems to be in sharp contrast with the policy adopted by the Federal Reserve after September 11 when, for a few days, the Federal Funds Rate was very close to zero. This paper shows that Bagehot's recommendation can be reconciled with the Fed's policy if one recognizes that Bagehot has in mind a commodity money regime so that the amount of reserves available is limited. A high price for this liquidity allows banks that need it most to self-select. In contrast, the Fed has a virtually unlimited ability to temporarily expand the money supply.

Suggested Citation

  • Antoine Martin, 2002. "Reconciling Bagehot with the Fed's response to Sept. 11," Research Working Paper RWP 02-10, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:rwp02-10
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    File URL: https://www.kansascityfed.org/documents/5397/pdf-RWP02-10.pdf
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    Cited by:

    1. Dobieslaw Tymoczko, 2005. "The Future of Central Banking in the Changing Financial Environment," NBP Working Papers 33, Narodowy Bank Polski.

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    Keywords

    Liquidity (Economics); lenders of last resort;

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