Fighting the Last War: Economists on the Lender of Last Resort

74 Pages Posted: 12 Jan 2015 Last revised: 22 Jan 2015

See all articles by Richard S. Grossman

Richard S. Grossman

Wesleyan University - Economics Department; Institute for Quantitative Social Sciences - Harvard University; Centre for Economic Policy Research

Hugh Rockoff

Newark College of Arts & Sciences - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: January 2015

Abstract

In this paper we trace the evolution of the lender of last resort doctrine—and its implementation—from the nineteenth century through the panic of 2008. We find that typically the most influential economists “fight the last war”: formulating policy guidelines that would have dealt effectively with the last crisis or in some cases the last two or three. This applies even to the still supreme voice among lender-of-last-resort theorists, Walter Bagehot, who wrestled with the how to deal with the financial crises that hit Britain between the end of the Napoleonic Wars and the panic of 1866. Fighting the last war may leave economists unprepared for meeting effectively the challenge of the next war.

Suggested Citation

Grossman, Richard S. and Rockoff, Hugh T., Fighting the Last War: Economists on the Lender of Last Resort (January 2015). NBER Working Paper No. w20832. Available at SSRN: https://ssrn.com/abstract=2548351

Richard S. Grossman (Contact Author)

Wesleyan University - Economics Department ( email )

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Institute for Quantitative Social Sciences - Harvard University ( email )

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Centre for Economic Policy Research ( email )

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Hugh T. Rockoff

Newark College of Arts & Sciences - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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