Open AccessPosted Content
Financial deregulation, monetary policy, and central banking
Marvin Goodfriend,Robert G. King +1 more
TLDR
The authors analyzes the need for financial regulations in the implementation of central bank policy and argues that regulations are not essential for the execution of monetary policy because high-powered money can be managed with open market operations in government bonds.Abstract:
The paper analyzes the need for financial regulations in the implementation of central bank policy. It emphasizes that a central bank serves two functions. Central banks function as monetary authorities, managing high-powered money to influence the price level and real activity; and they engage in regular and emergency lending to financial institutions. The authors term these functions monetary and banking policies, respectively. They emphasize that regulations are not essential for the execution of monetary policy because high-powered money can be managed with open market operations in government bonds. By its very nature, however, banking policy involves a swap of government securities for claims on individual banks. Just as private lenders must restrict and monitor individual borrowers, a central bank must regulate and supervise the institutions that borrow from it. Virtually all economists agree that there is an important role for monetary policy to stabilize prices and real activity. Banking policy has been rationalized as a source of funds for temporarily illiquid but solvent banks. To assess that rationale, the authors develop the distinction between illiquidity and insolvency in detail, showing the distinction to be meaningful precisely because information about the value of bank assets is incomplete and costly to obtain. Nevertheless, they explain why the cost of information per se cannot rationalize banking policy. On the basis of such considerations, they find it difficult to make a case for banking policy and the regulatory and supervisory activities that support it.read more
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Collective Moral Hazard, Maturity Mismatch, and Systemic Bailouts †
Emmanuel Farhi,Jean Tirole +1 more
TL;DR: In this article, the authors characterize the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets, and establish the robustness of their insights when the set of optimal regulations is set.
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Understanding the Soft Budget Constraint
TL;DR: In this paper, a clarification of the notion of a soft budget constraint, a concept widely used in the analysis of socialist, transitional, and market economies, is proposed and a classification of their causes and consequences is provided.
Posted Content
Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?
TL;DR: In this article, the authors provide a theoretical foundation for rescuing Bagehot's view and derive policy implications about banking regulation (solvency and liquidity ratios) and interventions of the Lender of Last Resort as well as on the disclosure policy of the Central Bank.
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Liquidity Shortages and Banking Crises
TL;DR: This article showed that bank failures can shrink the common pool of liquidity, creating, or exacerbating aggregate liquidity shortages, which could lead to a contagion of failures and a total meltdown of the system.
Journal ArticleDOI
Coordination failures and the lender of last resort: was bagehot right after all?
Jean-Charles Rochet,Xavier Vives +1 more
TL;DR: In this paper, a model of banks' liquidity crises that possesses a unique Bayesian equilibrium is proposed, and it is shown that there is a positive probability that a solvent bank cannot find liquidity assistance in the market.