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Liquidity Crises and Discount Window Lending: Theory and Implications for the Dollarization Debate

Author

Listed:
  • Gaetano Antinolfi

    (Washington University)

  • Todd Keister

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

Abstract

We study the consequences of a central bank providing an elastic currency through the use of discount window lending. In particular, we compare the set of equilibria generated when the interest rate is fixed in nominal terms with that generated when it is fixed in real terms. The two policies generate the same steady state equilibrium. However, fixing the nominal interest rate always generates additional, inflationary equilibria while the while fixing the real rate never does, regardless of the rate chosen. We argue that dollarization can be viewed as a mechanism for committing to having a fixed real interest rate on short-term credit, and discuss some implications of this analysis for the current debate in Mexico.

Suggested Citation

  • Gaetano Antinolfi & Todd Keister, 2000. "Liquidity Crises and Discount Window Lending: Theory and Implications for the Dollarization Debate," Working Papers 0002, Centro de Investigacion Economica, ITAM.
    • Handle: RePEc:cie:wpaper:0002
    as

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    File URL: http://ftp.itam.mx/pub/academico/inves/keister/00-02.pdf
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    References listed on IDEAS

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