Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more ➡
Download
Standard view
Full view
of .
Add note
Save to My Library
Sync to mobile
Look up keyword
Like this
2Activity
×
0 of .
Results for:
No results containing your search query
P. 1
Paul de Grauwe: The European Central Bank: Lender of Last Resort in the Government Bond Markets?

Paul de Grauwe: The European Central Bank: Lender of Last Resort in the Government Bond Markets?

Ratings: (0)|Views: 860|Likes:
Published by mrwonkish
The sovereign debt crisis has made it clear that central banking is more than keeping inflation low. Central banks are also responsible for financial stability. An essential tool in maintaining financial stability is provided by the capacity of the central bank to be the lender of last resort in the banking system. In this paper I argue that the ECB should also be the lender of last resort in the government bond markets of the monetary union, very much like the central banks in countries that issue debt in their own currencies are. This is necessary to prevent countries from being pushed into bad equilibria by self-fulfilling fears of liquidity crises in a monetary union. I also survey the different arguments that have been formulated by opponents of the view that the ECB should be the lender of last resort in the government bond markets.
The sovereign debt crisis has made it clear that central banking is more than keeping inflation low. Central banks are also responsible for financial stability. An essential tool in maintaining financial stability is provided by the capacity of the central bank to be the lender of last resort in the banking system. In this paper I argue that the ECB should also be the lender of last resort in the government bond markets of the monetary union, very much like the central banks in countries that issue debt in their own currencies are. This is necessary to prevent countries from being pushed into bad equilibria by self-fulfilling fears of liquidity crises in a monetary union. I also survey the different arguments that have been formulated by opponents of the view that the ECB should be the lender of last resort in the government bond markets.

More info:

Published by: mrwonkish on Sep 25, 2011
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See More
See less

10/15/2013

pdf

text

original

 
 
The European Central Bank: Lender of LastResort in the Government Bond Markets?
Paul De Grauwe
CES
IFO
W
ORKING
P
APER
N
O
.
 
3569
C
ATEGORY
7:
 
M
ONETARY
P
OLICY AND
I
NTERNATIONAL
F
INANCE
 S
EPTEMBER
2011
 An electronic version of the paper may be downloaded 
• 
from the SSRN website:www.SSRN.com
• 
from the RePEc website:www.RePEc.org
• 
from the CESifo website:
T
T
 
CESifo
Working Paper No. 3569
 
The European Central Bank: Lender of LastResort in the Government Bond Markets?
Abstract
The sovereign debt crisis has made it clear that central banking is more than keeping inflationlow. Central banks are also responsible for financial stability. An essential tool inmaintaining financial stability is provided by the capacity of the central bank to be the lenderof last resort in the banking system. In this paper I argue that the ECB should also be thelender of last resort in the government bond markets of the monetary union, very much likethe central banks in countries that issue debt in their own currencies are. This is necessary toprevent countries from being pushed into bad equilibria by self-fulfilling fears of liquiditycrises in a monetary union. I also survey the different arguments that have been formulated byopponents of the view that the ECB should be the lender of last resort in the government bondmarkets.JEL-Code: F330.Keywords: lender of last resort, European Central Bank, moral hazard, inflation.
Paul De GrauweUniversity of Leuven Economics Department  Naamsestraat 693000 Leuven Belgium paul.degrauwe@econ.kuleuven.be
 
2
Introduction
InOctober2008theECBdiscoveredthatthereismoretocentralbankingthanpricestability.ThisdiscoveryoccurredwhentheECBwasforcedtomassivelyincreaseliquiditytosavethebankingsystem.TheECBdidnothesitatetoexertitsfunctionoflenderoflastresorttothebankingsystem,settingasideallfearsofmoralhazardandinflation,andconcernsaboutthefiscalimplicationsofitslending.Thingswereverydifferentwhenthesovereigndebtcrisiseruptedin2010.ThentheECBwasgrippedbyhesitation.Astop-and-gopolicyensuedinwhichitprovidedliquidityinthegovernmentbondmarketsatsomemomentstowithdrawitatanotherone.WhenthecrisishitSpainandItalyinJuly2011,theECBwascompelledagaintoprovideliquidityinthegovernmentbondmarkets.IstherearolefortheECBasalenderoflastresortinthegovernmentbondmarket?ThisisthequestionIwanttoanalyzeinthispaper.
Fragilityofamonetaryunion
Itisusefultostartbydescribingtheweaknessofgovernmentbondmarketsinamonetaryunion.Nationalgovernmentsinamonetaryunionissuedebtina“foreign”currency,i.e.oneoverwhichtheyhavenocontrol.Asaresult,theycannotguaranteetothebondholdersthattheywillalwayshavethenecessaryliquiditytopayoutthebondatmaturity.Thiscontrastswith“standalone”countriesthatissuesovereignbondsintheirowncurrencies.Thisfeatureallowsthesecountriestoguaranteethatthecashwillalwaysbeavailabletopayoutthebondholders.Thusinastand-alonecountrythereisanimplicitguaranteethatthecentralbankisalenderoflastresortinthegovernmentbondmarket.Theabsenceofsuchaguaranteemakesthesovereignbondmarketsinamonetaryunionpronetoliquiditycrisesandforcesofcontagion,verymuchlikebankingsystemsthatlackalenderoflastresort.Insuchbankingsystems,solvencyproblemsinonebankmayleaddepositholdersofotherbankstowithdrawtheirdeposits.
When everybody does this at the same time the banks will

You're Reading a Free Preview

Download
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->