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Optimal lender of last resort policy in different financial systems

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  • Fecht, Falko
  • Tyrell, Marcel

Abstract

In a framework closely related to Diamond and Rajan (2001) we characterize different financial systems and analyze the welfare implications of different LOLR-policies in these financial systems. We show that in a bank-dominated financial system it is less likely that a LOLR-policy that follows the Bagehot rules is preferable. In financial systems with rather illiquid assets a discretionary individual liquidity assistance might be welfare improving, while in market-based financial systems, with rather liquid assets in the banks' balance sheets, emergency liquidity assistance provided freely to the market at a penalty rate is likely to be efficient. Thus, a "one size fits all"-approach that does not take the differences of financial systems into account is misguiding. --

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Bibliographic Info

Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2004,39.

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Date of creation: 2004
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Handle: RePEc:zbw:bubdp1:2917

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Keywords: Financial Crises; Lender of Last Resort; Comparing Financial Systems;

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References

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  1. Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
  2. Franklin Allen & Douglas Gale, 1976. "Optimal Financial Crises," Center for Financial Institutions Working Papers 97-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  3. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
  4. Charles Goodhart, 1999. "Myths About the Lender of Last Resort," FMG Special Papers sp120, Financial Markets Group.
  5. Douglas W. Diamond & Raghuram G. Rajan, 2003. "Liquidity Shortages and Banking Crises," NBER Working Papers 10071, National Bureau of Economic Research, Inc.
  6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  7. Hamerle, Alfred & Liebig, Thilo & Scheule, Harald, 2004. "Forecasting Credit Portfolio Risk," Discussion Paper Series 2: Banking and Financial Studies 2004,01, Deutsche Bundesbank, Research Centre.
  8. Franklin Allen & Douglas Gale, 2001. "Comparative Financial Systems: A Survey," Center for Financial Institutions Working Papers 01-15, Wharton School Center for Financial Institutions, University of Pennsylvania.
  9. Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc.
  10. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
  11. Goodhart, Charles A E, 1999. "Myths about the Lender of Last Resort," International Finance, Wiley Blackwell, vol. 2(3), pages 339-60, November.
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Cited by:
  1. Albulescu, Claudiu Tiberiu, 2007. "Reconsidérer la fonction de PDR : problème urgent au niveau de la zone euro
    [Rethinking the LOLR function: a new challenge for eurozone]
    ," MPRA Paper 16583, University Library of Munich, Germany, revised 29 Dec 2008.
  2. Bastidon, Cécile & Gilles, Philippe & Huchet, Nicolas, 2008. "The international lender of last resort and selective bail-out," Emerging Markets Review, Elsevier, vol. 9(2), pages 144-152, June.
  3. Cecile Bastidon & Philippe Gilles & Nicolas Huchet, 2008. "A Selective Bail-Out International Lending of Last Resort Model," Annals of Economics and Finance, Society for AEF, vol. 9(1), pages 103-114, May.

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