Is the Discount Window Necessary? A Penn-Central Perspective
The discount window has been under attack recently as a costly and unnecessary tool of policy. This paper argues that the primary role of the discount window should be to provide occasional, temporary support to particular financial markets during localized financial crises. The benefits of the discount window revolve around information externalities across firms resulting from confusion over the incidence of bad news, or reductions in the net worth of market intermediaries. The history of the Penn Central commercial paper crisis of 1970, and the Fed's use of the discount window to combat that crisis, are reviewed. The crisis is visible in a pronounced decline in outstanding commercial paper, an increase in the interest rate spreads for commercial paper and for long-term debt, and declines in stock prices. Cross-sectional variation in abnormal stock returns indicates that, controlling for other factors, firms that were likely to have had outstanding debt in the form of commercial paper suffered larger negative returns during the onset of the crisis, and larger positive returns after the Fed intervened to lower the cost of commercial paper rollover. Implications of the 1970 crisis for current financial markets, and for discount window policy, are considered in light of this evidence.
|Date of creation:||Dec 1993|
|Date of revision:|
|Publication status:||published as The Federal Reserve Bank of St. Louis Review, Vol. 76, no. 3 (May/June 1994), pp. 31-55.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
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.:
- Larry D. Wall & David R. Peterson, 1989.
"The effect of Continental Illinois' failure on the financial performance of other banks,"
89-9, Federal Reserve Bank of Atlanta.
- Wall, Larry D. & Peterson, David R., 1990. "The effect of Continental Illinois' failure on the financial performance of other banks," Journal of Monetary Economics, Elsevier, vol. 26(1), pages 77-99, August.
- repec:ucp:bknber:9780226355887 is not listed on IDEAS
- Marvin Goodfriend & Robert G. King, 1988.
"Financial deregulation, monetary policy, and central banking,"
88-01, Federal Reserve Bank of Richmond.
- Marvin Goodfriend & Robert G. King, 1988. "Financial deregulation, monetary policy, and central banking," Economic Review, Federal Reserve Bank of Richmond, issue May, pages 3-22.
- Goodfriend, M. & King, R.G., 1988. "Financial Deregulation, Monetary Policy, And Central Banking," RCER Working Papers 121, University of Rochester - Center for Economic Research (RCER).
- Edward J. Kane, 1989. "How Incentive-Incompatible Deposit-Insurance Funds Fail," NBER Working Papers 2836, National Bureau of Economic Research, Inc.
- Calomiris, Charles W. & Schweikart, Larry, 1991. "The Panic of 1857: Origins, Transmission, and Containment," The Journal of Economic History, Cambridge University Press, vol. 51(04), pages 807-834, December.
- Charles W. Calomiris & Gary Gorton, 1991.
"The Origins of Banking Panics: Models, Facts, and Bank Regulation,"
in: Financial Markets and Financial Crises, pages 109-174
National Bureau of Economic Research, Inc.
- Charles W. Calomiris & Gary Gorton, . "The Origins of Banking Panics: Models, Facts, and Bank Regulation," Rodney L. White Center for Financial Research Working Papers 11-90, Wharton School Rodney L. White Center for Financial Research.
- Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
- Charles W. Calomiris, 1989. "Deposit insurance: lessons from the record," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 10-30.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4573. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.