Limited Commitment and Central Bank Lending - Economic Quarterly, Fall 1999 - Federal Reserve Bank of Richmond
Limited Commitment and Central Bank Lending
Limited Commitment and Central Bank Lending - Economic Quarterly Fall 1999
Limited Commitment and Central Bank Lending - Economic Quarterly, Fall 1999 - Federal Reserve Bank of Richmond
Article
Fall
1999
Marvin Goodfriend {margoo1}
Jeffrey M. Lacker {jeflac1}
<p>This consideration of central bank lending as a publicly provided line of credit begins by describing how private line-of-credit contracts control moral hazard and limit lending to insolvent borrowers. The fundamental problem for a central bank is to credibly commit to limit its lending. Failure to do so creates moral hazard with adverse consequences. Of five candidate approaches to the commitment problem – namely, good offices only, collateral and early intervention, constructive ambiguity, extended supervisory and regulatory reach, and building a reputation for not lending – only the last will work in practice. Lessons from the historical acquisition of credibility for low inflation suggest a particular scenario by which a central bank could gradually acquire a reputation for limiting its lending commitment.</p>
/RichmondFedOrg/publications/research/economic_quarterly/1999/fall/pdf/goodfriend.pdf
Financial Markets & Institutions
<p>This consideration of central bank lending as a publicly provided line of credit begins by describing how private line-of-credit contracts control moral hazard and limit lending to insolvent borrowers. The fundamental problem for a central bank is to credibly commit to limit its lending. Failure to do so creates moral hazard with adverse consequences. Of five candidate approaches to the commitment problem – namely, good offices only, collateral and early intervention, constructive ambiguity, extended supervisory and regulatory reach, and building a reputation for not lending – only the last will work in practice. Lessons from the historical acquisition of credibility for low inflation suggest a particular scenario by which a central bank could gradually acquire a reputation for limiting its lending commitment.</p>
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1
Financial Markets
Lending
Moral Hazard
Too Big to Fail
<p>This consideration of central bank lending as a publicly provided line of credit begins by describing how private line-of-credit contracts control moral hazard and limit lending to insolvent borrowers. The fundamental problem for a central bank is to credibly commit to limit its lending. Failure to do so creates moral hazard with adverse consequences. Of five candidate approaches to the commitment problem – namely, good offices only, collateral and early intervention, constructive ambiguity, extended supervisory and regulatory reach, and building a reputation for not lending – only the last will work in practice. Lessons from the historical acquisition of credibility for low inflation suggest a particular scenario by which a central bank could gradually acquire a reputation for limiting its lending commitment.</p>
Economic Quarterly
Fall
1999