← Search

Journal of Banking & Finance Vol. 29 No. 5 2005

The lender of last resort

Charles A. E. Goodhart1; Haizhou Huang2

1 London School of Economics and Political Science · 2 International Monetary Fund

Abstract

This paper develops a model of the lender of last resort (LOLR) from a Central Bank (CB) viewpoint. The model in a static setting suggests that the CB would only rescue banks which are above a threshold size, consistent with the insight of “too big to fail”. In a dynamic setting, CB’s optimal policy in liquidity support depends on the trade off between contagion and moral hazard effects. Our results show that contagion is the key factor affecting CB’s incentives in providing LOLR and they also provide a rationalization for “constructive ambiguity”.

DOI
10.1016/j.jbankfin.2003.11.003
Volume
29
Issue
5
Pages
1059-1082
Language
en
Sources
openalex crossref bibtex:phds-export.bib

Cite