Financial Crises, Payment System Problems, and Discount Window Lending

J. OF MONEY, CREDIT, AND BANKING, Vol. 28 No. 4, November 1996

Posted: 13 May 1998

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Abstract

In a developed economy, financial crises are rapidly conveyed to the payment system, which tends to rely on private credit extensions in most countries. While many authors recommend that the central bank do no more than provide adequate aggregate liquidity during a crisis, this policy requires well-functioning private credit markets to channel liquidity to "solvent, but illiquid" firms. This paper presents a model of private lending which defines a crisis as a tiime when lenders become uncertain about how to assess financial risks, and therefore rationally withdraw from making new loans. In such an environment, a government lender of last resort can improve social welfare.

JEL Classification: G23

Suggested Citation

Flannery, Mark Jeffrey, Financial Crises, Payment System Problems, and Discount Window Lending. J. OF MONEY, CREDIT, AND BANKING, Vol. 28 No. 4, November 1996. Available at SSRN: https://ssrn.com/abstract=7591

Mark Jeffrey Flannery (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

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