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Financial Crises, Payment System Problems, and Discount Window Lending

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Author Info
Flannery, Mark J

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Abstract

In a developed economy, financial crises are rapidly conveyed to the payment system, which tends to rely on private credit extensions in most countries. While many authors recommend that the central bank do no more than provide adequate aggregate liquidity during a crisis, this policy requires well-functioning private credit markets to channel liquidity to solvent, but illiquid, firms. This paper presents a model of private lending which defines a crisis as a time when lenders become uncertain about how to assess financial risks and, therefore, rationally withdraw from making new loans. In such an environment, a government lender of last resort can improve social welfare. Copyright 1996 by Ohio State University Press.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 28 (1996)
Issue (Month): 4 (November)
Pages: 804-24
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Handle: RePEc:mcb:jmoncb:v:28:y:1996:i:4:p:804-24

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Rochet, Jean Charles & Vives, Xavier, 2002. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," CEPR Discussion Papers 3233, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Hassan Naqvi, 2004. "Banking Crises and the Lender of Last Resort: How crucial is the role of information?," Finance 0410009, EconWPA. [Downloadable!]
  3. Wagner, Wolf, 2006. "Diversification at financial institutions and systemic crises," Discussion Paper 71, Tilburg University, Center for Economic Research. [Downloadable!]
  4. Mathias Drehmann & Kleopatra Nikolaou, 2009. "Funding Liquidity Risk: Definition and Measurement," Working Paper Series 1024, European Central Bank. [Downloadable!]
  5. Repullo, Rafael, 2005. "Liquidity, Risk-Taking and the Lender of Last Resort," CEPR Discussion Papers 4967, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Wagner, Wolf, 2006. "The broadening of activities in the financial system : implications for financial stability and regulation," Discussion Paper 72, Tilburg University, Center for Economic Research. [Downloadable!]
  7. Cornelia Holthausen & Xavier Freixas, 2001. "Interbank market integration under asymmetric information," Working Paper Series 074, European Central Bank. [Downloadable!]
  8. Xavier Freixas, 2003. "An Overall Perspective on Banking Regulation," Economics Working Papers 664, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  9. Hasan , Iftekhar & Mester, Loretta, 2008. "Central bank institutional structure and effective central banking: cross-country empirical evidence," Research Discussion Papers 29/2008, Bank of Finland. [Downloadable!]
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  10. X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank. [Downloadable!]
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  11. David R. Skeie, 2008. "Banking with nominal deposits and inside money," Staff Reports 242, Federal Reserve Bank of New York. [Downloadable!]
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  12. Xavier Freixas & Anthony M. Santomero, 2002. "An overall perspective on banking regulation," Working Papers 02-1, Federal Reserve Bank of Philadelphia. [Downloadable!]
  13. Ana Lasaosa & Merxe Tudela, . "Risks and efficiency gains of a tiered structure in large-value payments: a simulation approach," Bank of England working papers 337, Bank of England. [Downloadable!]
  14. Franklin Allen & Elena Carletti & Douglas Gale, 2009. "Interbank Market Liquidity and Central Bank Intervention," Economics Working Papers ECO2009/09, European University Institute. [Downloadable!]
  15. X. Freixas, 2000. "Optimal Bail Out Policy, Conditionality and Constructive Ambiguity," DNB Staff Reports (discontinued) 49, Netherlands Central Bank. [Downloadable!]
  16. Ewerhart, C. & Valla, N., 2007. "Financial Market Liquidity and the Lender of Last Resort," Documents de Travail 178, Banque de France. [Downloadable!]
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