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Microeconomic Foundation Of Lender Of Last Resort From The Viewpoint Of Payments

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  • YASUO MAEDA
  • YOSHIKIYO SAKAI

Abstract

We construct a model to clarify the mechanism by which the lender of last resort (LLR) can prevent bank runs. In our model, a bank has both the function of facilitating payments in which inside money is settled using outside money and the function of financial intermediation using a deposit contract. The deposit contract might lead to a bank run, and might even contribute to an efficient allocation. Therefore, to consider the liquidity supply by the LLR, we introduce the deposit contract as a factor of instability in the banking model. We show that the LLR can assist in the recovery of both the efficiency and stability of the financial system.

Suggested Citation

  • Yasuo Maeda & Yoshikiyo Sakai, 2008. "Microeconomic Foundation Of Lender Of Last Resort From The Viewpoint Of Payments," The Japanese Economic Review, Japanese Economic Association, vol. 59(2), pages 178-193, June.
    • Handle: RePEc:bla:jecrev:v:59:y:2008:i:2:p:178-193
    DOI: 10.1111/j.1468-5876.2008.00404.x
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