The Lender of Last Resort in a General Equilibrium Framework

Kotak, Ashkay, Ozsoylev, Han and Tsomocos, Dimitrios (2017) The Lender of Last Resort in a General Equilibrium Framework. Saïd Business School Working Paper.

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Abstract

This paper models the role of the lender of last resort (LoLR) in a general equilibrium framework. We allow for heterogeneous agents and a risk-averse banking sector, and incorporate the frictions of endogenous default, liquidity, and money. Adverse supply shocks in monetary endowments trigger default, leading to deterioration in the value of bank assets, and subsequent bank illiquidity in some states of the world. LoLR intervention is then assessed with regards to its economy-wide effect on welfare, bank profitability, and the level of default. The results provide a rationalisation for constructive ambiguity and the ‘too big to fail’ problem.

Item Type: Oxford Saïd Research Paper
Date Deposited: 30 Nov 2018 11:08
Last Modified: 30 Nov 2018 11:08
URI: http://eureka.sbs.ox.ac.uk/id/eprint/7167

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