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Micro-aspects of Monetary Policy: Lender of Last Resort and Selection of Banks in Pre-war Japan

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  • Tetsuji Okazaki

    (Faculty of Economics, University of Tokyo)

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    Abstract

    This paper explores how the Bank of Japan (BOJ) dealt with the trade-off between stability of the financial system and the moral hazard of banks in pre-war Japan. The BOJ concentrated Lender of Last Resort (LLR) loans with those banks that had an established transaction relationship with the BOJ. At the same time, the BOJ carefully selected its transaction counterparts, and did not hesitate to end the relationship if the performance of a counterpart declined. Further, the BOJ was selective in providing LLR loans. Through this policy, the BOJ could avoid the moral hazard that the LLR policy might otherwise have incurred.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2006/2006cf447.pdf
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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-447.

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    Length: 49pages
    Date of creation: Nov 2006
    Date of revision:
    Handle: RePEc:tky:fseres:2006cf447

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