Liquidity Crises and Discount Window Lending: Theory and Implications for the Dollarization Debate
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.
|Date of creation:||Sep 2000|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +525 628 4197
Fax: +525 628 4058
Web page: http://cie.itam.mx/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hornstein, Andreas & Krusell, Per, 1993. "Money and Insurance in a Turnpike Environment," Economic Theory, Springer, vol. 3(1), pages 19-34, January.
- Eichengreen, Barry, 2002. "When to Dollarize," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 1-24, February.
- Mitsui, Toshihide & Watanabe, Shinichi, 1989. "Monetary growth in a turnpike environment," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 123-137, July.
- Freeman, Scott, 1999. "Rediscounting under aggregate risk," Journal of Monetary Economics, Elsevier, vol. 43(1), pages 197-216, February.
- Stephen D. Williamson, 1995.
"Discount Window Lending and Deposit Insurance,"
9504001, EconWPA, revised 18 Apr 1995.
- Bruce D. Smith & Warren E. Weber, 1998.
"Private money creation and the Suffolk Banking System,"
591, Federal Reserve Bank of Minneapolis.
- Bruce D. Smith & Warren E. Weber, 1999. "Private money creation and the Suffolk Banking System," Proceedings, Federal Reserve Bank of Cleveland, pages 624-667.
- Smith, Bruce D & Weber, Warren E, 1999. "Private Money Creation and the Suffolk Banking System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 624-59, August.
- Bruce D. Smith & Warren E. Weber, 1998. "Private money creation and the Suffolk Banking System," Working Paper 9821, Federal Reserve Bank of Cleveland.
- Antinolfi, Gaetano & Huybens, Elisabeth & Keister, Todd, 2001.
"Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort,"
Journal of Economic Theory,
Elsevier, vol. 99(1-2), pages 187-219, July.
- Gaetano Antinolfi & Elisabeth Huybens & Todd Keister, 2000. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Working Papers 0001, Centro de Investigacion Economica, ITAM.
- Gaetano Antinolfi & Elisabeth Huybens, 2000. "Monetary Stability and Liquidity Crises: The Role of the Lender of Last Resort," Econometric Society World Congress 2000 Contributed Papers 1156, Econometric Society.
- Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
- Sargent, Thomas J & Wallace, Neil, 1982. "The Real-Bills Doctrine versus the Quantity Theory: A Reconsideration," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1212-36, December.
- Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
- Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. II. The case of pure exchange with money," Journal of Economic Theory, Elsevier, vol. 24(1), pages 112-142, February.
- Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62 National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:cie:wpaper:0002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diego Dominguez)
If references are entirely missing, you can add them using this form.