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Bank's Liquidity Demand in the Presence of a Lender of Last Resort

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Author Info

  • Martin Gonzalez Eiras

    () (Department of Economics, Universidad de San Andres)

Abstract

I use a natural experiment to estimate the effect that a Lender of Last Resort has on banks’ liquidity demand. In December 1996 Argentina’s Central Bank signed with a group of international banks a contingent credit line agreement that enhanced its ability to act as a LLR. I run difference-in-difference regressions of the effect of the announcement of the insurance contract on banks’ liquidity holdings, using ownership status and size to identify the groups of treatment and control banks. Finally I rule out general equilibrium feedback effects through the interbank market between control and treatment banks. Results indicate a reduction of approximately 6.7 percentage points in banks’ liquidity holdings in the presence of a LLR.

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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc61.pdf
File Function: First version, 2003
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Bibliographic Info

Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 61.

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Length: 35 pages
Date of creation: Sep 2003
Date of revision: Sep 2003
Handle: RePEc:sad:wpaper:61

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Related research

Keywords: banks; liquidity; demand; lender; last resort;

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References

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  1. Guillermo Alger & Ingela Alger, 1999. "Liquid Assets in Banks: Theory and Practice," Boston College Working Papers in Economics 446, Boston College Department of Economics.
  2. 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.
  3. Joshua Angrist & Alan Krueger, 1998. "Empirical Strategies in Labor Economics," Working papers 98-7, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Gerald Caprio & Michael Dooley & Danny Leipziger & Carl Walsh, 1996. "The lender of last resort function under a currency board: The case of Argentina," Open Economies Review, Springer, vol. 7(1), pages 625-650, March.
  5. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
  6. Bengt Holmstrom & Jean Tirole, 1998. "Private and Public Supply of Liquidity," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 1-40, February.
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Cited by:
  1. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.
  2. Repullo, Rafael, 2005. "Liquidity, Risk-Taking and the Lender of Last Resort," CEPR Discussion Papers 4967, C.E.P.R. Discussion Papers.
  3. Eduardo Levy Yeyati & Alain Ize, 2005. "Financial De-Dollarization: Is It for Real?," IMF Working Papers 05/187, International Monetary Fund.
  4. Acharya, Viral & Song Shin, Hyun & Yorulmazer, Tanju, 2009. "Endogenous choice of bank liquidity: the role of fire sales," Bank of England working papers 376, Bank of England.
  5. Acharya, Viral V & Shin, Hyun Song & Yorulmazer, Tanju, 2007. "Fire Sales, Foreign Entry and Bank Liquidity," CEPR Discussion Papers 6309, C.E.P.R. Discussion Papers.

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