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Banking Panics and the Lender of Last Resort in a Monetary Economy

Author

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  • Makoto (M.) Watanabe

    (VU Amsterdam)

  • Tarishi Matsuoka

    (Tokyo Metropolitan University)

Abstract

This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank’s monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks’ ex ante incentive to hold reserves, which increases the probability of a panic, and causes moral hazard in asset investments. We also examine the combined effect of other related policies such as a penalty in lending rate, liquidity requirements, and constructive ambiguity.

Suggested Citation

  • Makoto (M.) Watanabe & Tarishi Matsuoka, 2019. "Banking Panics and the Lender of Last Resort in a Monetary Economy," Tinbergen Institute Discussion Papers 19-002/V, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20190002
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    References listed on IDEAS

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    Cited by:

    1. Matsuoka, Tarishi & Watanabe, Makoto, 2019. "Banking crises and liquidity in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).

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    More about this item

    Keywords

    Monetary Equilibrium; Banking Panic; Moral Hazard; Lender of Last Resort;
    All these keywords.

    JEL classification:

    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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