Paper #708

Títol:

The lender of last resort: A 21st Century approach

Autors:

Xavier Freixas, Bruno M. Parigi i Jean-Charles Rochet

Data:

Setembre 2003

Resum:

The object of this paper is to analyze rigorously the role of a Lender of Last Resort by providing a framework where the distinction between insolvency and illiquidity is not clearly cut. Determining the optimal Lender of Last Resort policy requires a careful modeling of the structure of the interbank market and of the closure policy. In our set up, the results depend upon the existence of moral hazard. If the main source of moral hazard is the banks’ lack of incentives to screen loans, then the Lender of Last Resort may have to intervene to improve the e¢ciency of an unsecured interbank market; if instead, the main source of moral hazard is loans monitoring, then the interbank market should be secured and the Lender of Last Resort should never intervene.

Paraules clau:

Lender of Last Resort, interbank market, liquidity

Codis JEL:

G21, G28

Àrea de Recerca:

Finances i Comptabilitat

Publicat a:

Journal of the European Economic Association, Vol 2(6) Dec 2004

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