Financial Market Liquidity and the Lender of Last Resort

44 Pages Posted: 10 Oct 2010

See all articles by Christian Ewerhart

Christian Ewerhart

University of Zurich, Department of Economics

Natacha Valla

European Union - European Investment Bank; European Central Bank (ECB); Banque de France

Date Written: September 2007

Abstract

It has been argued in the literature that emergency liquidity injections should be conducted preferably in the form of open market operations. As we show in the present paper, this is not necessarily the case when liquidity may be alternatively used for speculative purposes during the crisis. In such a situation, non-discriminating operations may attract unfunded market participants that divert funding resources away from its best uses in the financial sector. As a consequence, targeted liquidity assistance may become strictly superior. The analysis might have a bearing on recent developments in the context of the subprime crisis.

Keywords: Liquidity, financial markets, lender of last resort

JEL Classification: G14, G18

Suggested Citation

Ewerhart, Christian and Valla, Natacha, Financial Market Liquidity and the Lender of Last Resort (September 2007). Banque de France Working Paper No. 178, Available at SSRN: https://ssrn.com/abstract=1689466 or http://dx.doi.org/10.2139/ssrn.1689466

Christian Ewerhart (Contact Author)

University of Zurich, Department of Economics ( email )

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Natacha Valla

European Union - European Investment Bank ( email )

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