Discussion paper

DP18041 Lender of Last Resort and Moral Hazard

Charles Goodhart Rosa Lastra

29 Mar 2023

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.

£6.00

Citation

Goodhart, C and R Lastra (2023), ‘DP18041 Lender of Last Resort and Moral Hazard‘, CEPR Discussion Paper No. 18041. CEPR Press, Paris & London. https://cepr.org/publications/dp18041