Who Should Act as Lender of Last Resort? An Incomplete Contracts Model

Posted: 26 Oct 2000

See all articles by Rafael Repullo

Rafael Repullo

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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This paper presents a model of a bank subject to liquidity shocks that require borrowing from a lender of last resort. Two government agencies may perform this function: a central bank and a deposit insurance corporation. The agencies share supervisory information, which provides a nonverifiable signal of the bank's financial condition, and use it to decide whether to support it. It is shown that the optimal institutional design involves the two agencies: the central bank dealing with small liquidity shocks, and the deposit insurance corporation with large shocks. Furthermore, except for very small shocks, they should lend at penalty rates.

JEL Classification: E58, G21, G28

Suggested Citation

Repullo, Rafael, Who Should Act as Lender of Last Resort? An Incomplete Contracts Model. Journal of Money, Credit and Banking, Vol. 32, No. 3, Part II, August 2000 "What Should Central Banks Do?: A conference sponsored by the Federal Reserve Bank of Cleveland, Oct. 27-29, 1999, Joseph G. Haubrich, Special Issue Editor". Available at SSRN: https://ssrn.com/abstract=228971

Rafael Repullo (Contact Author)

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
+34 91429 0551 (Phone)
+34 91429 1056 (Fax)

HOME PAGE: http://www.cemfi.es/~repullo/

Centre for Economic Policy Research (CEPR)

United Kingdom

European Corporate Governance Institute (ECGI)

B-1050 Brussels

HOME PAGE: http://www.ecgi.org

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