Microeconomic foundation of lender of last resort from the viewpoint of payments

Yasuo Maeda, Yoshikiyo Sakai

Research output: Contribution to journalArticle

Abstract

We construct a model to clarify the mechanism by which the lender of last resort (LLR) can prevent bank runs. In our model, a bank has both the function of facilitating payments in which inside money is settled using outside money and the function of financial intermediation using a deposit contract. The deposit contract might lead to a bank run, and might even contribute to an efficient allocation. Therefore, to consider the liquidity supply by the LLR, we introduce the deposit contract as a factor of instability in the banking model. We show that the LLR can assist in the recovery of both the efficiency and stability of the financial system.

Original languageEnglish
Pages (from-to)178-193
Number of pages16
JournalJapanese Economic Review
Volume59
Issue number2
DOIs
Publication statusPublished - 2008 Jun 1

ASJC Scopus subject areas

  • Economics and Econometrics

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