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Economic Crises and the Eligibility for the Lender of Last Resort: Evidence from 19th century France

Author

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  • V. Bignon
  • C. Jobst

Abstract

This paper shows that a central bank can more efficiently mitigate economic crises when it broadens eligibility for its discount facility to any safe asset or solvent agent. We use difference-in-differences panel regressions and emulate crises by studying how defaults of banks and non-agricultural firms were affected by the arrival of an agricultural disease. We exploit the specificities of the implementation of the discount window to deal with the endogeneity of the access to the central bank to the arrival of the crisis and local default rates. We find that broad eligibility reduced significantly the increase in the default rate when the shock hit the local economy. A counterfactual exercise shows that defaults would have been 10% to 15% higher if the Bank of France would have implemented the strictest eligibility rule. This effect is identified independently of changes in policy interest rates and the fiscal deficit.

Suggested Citation

  • V. Bignon & C. Jobst, 2017. "Economic Crises and the Eligibility for the Lender of Last Resort: Evidence from 19th century France," Working papers 618, Banque de France.
  • Handle: RePEc:bfr:banfra:618
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    1. Nobuhiro Kiyotaki & John Moore, 2005. "2002 Lawrence R. Klein Lecture Liquidity And Asset Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 317-349, May.
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    Cited by:

    1. Anson, Mike & Bhola, David & Kang, Miao & Thomas, Ryland, 2017. "The Bank of England as lender of last resort: New historical evidence from daily transactional data," eabh Papers 17-03, The European Association for Banking and Financial History (EABH).
    2. J. Barthélemy & V. Bignon & B. Nguyen, 2017. "Illiquid Collateral and Bank Lending during the European Sovereign Debt Crisis," Working papers 631, Banque de France.
    3. Bindseil, Ulrich & Corsi, Marco & Sahel, Benjamin & Visser, Ad, 2017. "The Eurosystem collateral framework explained," Occasional Paper Series 189, European Central Bank.
    4. Mike Anson & David Bholat Author-Name-First: David & Miao Kang & Ryland Thomas, 2017. "The Bank of England as Lender of Last Resort: New historical evidence from daily transactional data," Working Papers 0117, European Historical Economics Society (EHES).

    More about this item

    Keywords

    discount window; collateral; Bagehot rule; central bank; default rate;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-
    • N54 - Economic History - - Agriculture, Natural Resources, Environment and Extractive Industries - - - Europe: 1913-

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