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Myths about the lender of last resort

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This topic has been prone to the accretion of myths that sometimes obscure the key issues. As a start, Bagehot is often treated as the first to write on the subject, ignoring Thornton's contribution. Next, Bagehot's proposal that such lending be at 'high' rates is incorrectly translated into 'penalty' rates. This paper, however, concentrates on and criticizes four further myths: that it is generally possible to distinguish between illiquidity and insolvency; that national LOLR capacities are unlimited, whereas international bodies, such as the IMF, cannot function as an ILOLR; that moral hazard is everywhere and at all times a major consideration; and that it might be possible to dispense with LOLR altogether.

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en

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http://eprints.lse.ac.uk/7146/

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