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Bank's Liquidity Demand in the Presence of a Lender of Last Resort

  • Martin Gonzalez Eiras

    ()

    (Department of Economics, Universidad de San Andres)

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    I use a natural experiment to estimate the effect that a Lender of Last Resort has on banks’ liquidity demand. In December 1996 Argentina’s Central Bank signed with a group of international banks a contingent credit line agreement that enhanced its ability to act as a LLR. I run difference-in-difference regressions of the effect of the announcement of the insurance contract on banks’ liquidity holdings, using ownership status and size to identify the groups of treatment and control banks. Finally I rule out general equilibrium feedback effects through the interbank market between control and treatment banks. Results indicate a reduction of approximately 6.7 percentage points in banks’ liquidity holdings in the presence of a LLR.

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    File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc61.pdf
    File Function: First version, 2003
    Download Restriction: no

    Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 61.

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    Length: 35 pages
    Date of creation: Sep 2003
    Date of revision: Sep 2003
    Handle: RePEc:sad:wpaper:61
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    Web page: http://www.udesa.edu.ar

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    1. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
    2. Jean-Charles Rochet & Xavier Vives, 2004. "Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1116-1147, December.
    3. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit-Taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, 02.
    4. Joshua Angrist & Alan Krueger, 1998. "Empirical Strategies in Labor Economics," Working Papers 780, Princeton University, Department of Economics, Industrial Relations Section..
    5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
    6. Xavier Freixas & Jean-Charles Rochet, 1997. "Microeconomics of Banking," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061937, June.
    7. Guillermo Alger & Ingela Alger, 1999. "Liquid Assets in Banks: Theory and Practice," Boston College Working Papers in Economics 446, Boston College Department of Economics.
    8. Holmstrom, B & Tirole, J, 1996. "Private and Public Supply of Liquidity," Working papers 96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
    9. Miron, Jeffrey A, 1986. "Financial Panics, the Seasonality of the Nominal Interest Rate, and theFounding of the Fed," American Economic Review, American Economic Association, vol. 76(1), pages 125-40, March.
    10. Gerald Caprio & Michael Dooley & Danny Leipziger & Carl Walsh, 1996. "The lender of last resort function under a currency board: The case of Argentina," Open Economies Review, Springer, vol. 7(1), pages 625-650, March.
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