Economic Crises and the Eligiblity for the Lender of Last Resort: Evidence from 19th Century France

51 Pages Posted: 1 Mar 2017

See all articles by Vincent Bignon

Vincent Bignon

Banque de France

Clemens Jobst

Departement of Economic and Social History; Centre for Economic Policy Research (CEPR)

Date Written: February 24, 2017

Abstract

This paper shows that a central bank can more efficiently mitigate economic crises when it broadens eligibility for its discount facility to any safe asset or solvent agent. We use difference-in-differences panel regressions and emulate crises by studying how defaults of banks and non-agricultural firms were affected by the arrival of an agricultural disease. We exploit the specificities of the implementation of the discount window to deal with the endogeneity of the access to the central bank to the arrival of the crisis and local default rates. We find that broad eligibility reduced significantly the increase in the default rate when the shock hit the local economy. A counterfactual exercise shows that defaults would have been 10% to 15% higher if the central bank would have implemented the strictest eligibility rule. This effect is identified independently of changes in policy interest rates and the fiscal deficit.

Keywords: discount window, collateral, Bagehot rule, Bank of France, default

JEL Classification: E44, E51, G28, E58, N14, N54

Suggested Citation

Bignon, Vincent and Jobst, Clemens, Economic Crises and the Eligiblity for the Lender of Last Resort: Evidence from 19th Century France (February 24, 2017). ECB Working Paper No. 2027, Available at SSRN: https://ssrn.com/abstract=2925720

Vincent Bignon (Contact Author)

Banque de France ( email )

DGEI 49-1430
31 rue Croix des Petits Champs
Paris, 75001
France
+33142924330 (Phone)

Clemens Jobst

Departement of Economic and Social History ( email )

Universitätsring 1
Vienna, Vienna 1010
Austria

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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