This paper studies banks' liquidity provision in the Lagos and Wright model of monetary exchanges. With aggregate uncertainty we show that banks sometimes exhaust their cash reserves and fail to satisfy their depositors' need of consumption smoothing. The banking panics can be eliminated by the...

This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of bank's monetary reserves (or a banking panic) occurs endogenously. We show that while a discount window policy introduced by the LLR is welfare improving, it reduces the banks' ex ante incentive...

This paper studies the role of a lender of last resort (LLR) in a monetary model where a shortage of a bank's monetary reserves (a liquidity crisis) occurs endogenously. We show that discount window lending by the LLR is welfare-improving but reduces banks' ex-ante incentive to hold monetary...