This paper establishes a theoretical model to examine the LOLR policy when a central bank cannot distinguish between solvent and insolvent banks. We study two cases: a case where the central bank cannot screen insolvent banks and a case where the central bank can only imperfectly screen...

When a central bank implements the LOLR policy in a financial crisis, bank creditors often infer a bank's quality from whether or not it borrows from the central bank. We establish a formal model to study the optimal LOLR policy in the presence of this signaling effect, assuming that the central...

We build a general equilibrium model to analyze how the ability of banks to create money can affect asset prices and financial stability. In the model, demand for liquidity takes the form of demand for money to make payments. We show that banks can provide elastic aggregate liquidity by creating...