Lender of Last Resort and moral hazard

Goodhart, C. A. E.; and Lastra, Rosa (2023) Lender of Last Resort and moral hazard [Working paper]

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In this paper we revisit the Lender of Last Resort (LOLR) function of the central bank and the associated moral hazard incentives. We argue that, from an economic perspective, the strict application of penalties to the operation of LOLR actions can make that instrument unworkable. Instead, we suggest that both penalties and publication should only be applied after such LOLR had been in place for a time. Normative frameworks ought to be adjusted in this regard.

Item Type	Working paper
Keywords	lender-of-last-resort,illiquidity,insolvency,stigma
Departments	Financial Markets Group
Date Deposited	19 Apr 2023 12:54
URI	https://researchonline.lse.ac.uk/id/eprint/118679

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https://cepr.org/ (Publisher)
https://www.fmg.ac.uk/people/charles-goodhart (Author)
https://cepr.org/publications/dp18041
https://cepr.org/publications/discussion-papers (Official URL)

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