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Myths about the Lender of Last Resort

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  • Goodhart, Charles A E

Abstract

This topic has been prone to the accretion of myths that sometimes obscure the key issues. As a start, Bagehot is often treated as the first to write on the subject, ignoring Thornton's contribution. Next, Bagehot's proposal that such lending be at "high" rates is incorrectly translated into "penalty" rates. This paper, however, concentrates on and criticizes four further myths: that it is generally possible to distinguish between illiquidity and insolvency; that national LOLR capacities are unlimited, whereas international bodies, such as the IMF, cannot function as an ILOLR; that moral hazard is everywhere and at all times a major consideration; and that it might be possible to dispense with LOLR altogether. Copyright 1999 by Blackwell Publishers Ltd.

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  • Goodhart, Charles A E, 1999. "Myths about the Lender of Last Resort," International Finance, Wiley Blackwell, vol. 2(3), pages 339-360, November.
  • Handle: RePEc:bla:intfin:v:2:y:1999:i:3:p:339-60
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    References listed on IDEAS

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    1. Preventing bank runs – a primer
      by ? in Bruegel blog on 2013-04-02 15:58:20

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    Cited by:

    1. Fecht, Falko & Tyrell, Marcel, 2004. "Optimal lender of last resort policy in different financial systems," Discussion Paper Series 1: Economic Studies 2004,39, Deutsche Bundesbank.
    2. Åke Lönnberg & Peter Stella, 2008. "Issues in Central Bank Finance and Independence," IMF Working Papers 08/37, International Monetary Fund.
    3. Rafael Repullo, 2005. "Liquidity, Risk Taking, and the Lender of Last Resort," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
    4. Antoine Martin, 2008. "Reconciling Bagehot with the Fed's response to September 11," Staff Reports 217, Federal Reserve Bank of New York.
    5. Rafael Repullo, 2005. "Liquidity, Risk Taking, and the Lender of Last Resort," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), pages -, September.

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