After the 2008 financial crash governments and central banks had to rescue banks which had become insolvent or illiquid, and whose failure threatened the Western financial system. The bill for this taxpayer funded bailout came to over USD 20 trillion globally, including assistance from US, EU,...

This paper develops a model of the lender of last resort. It provides an analytical basis for too big too fail and a rationale for constructive ambiguity. Key results are that if contagion (moral hazard) is the main concern, the Central Bank (CB) will have an excessive (little) incentive to...

This paper develops a model of the lender of last resort (LOLR). In a simple one-period setting, the Central Bank (CB) should only rescue banks which are above a threshold size, thus providing an analytical basis for "too big too fail". We also provide a rationale for "constructive ambiguity"....