ABSTRACT
Averting banking panics and crises is the job of the central bank. As lender of last resort (LLR), it has the responsibility of preventing panic-induced collapses of the money stock. Traditionally, it has discharged this responsibility by making emergency loans of high-powered money to sound but temporarily illiquid banks at penalty rates on good collateral. Ideally, the mere announcement of its commitment, by assuaging people’s fears of inability to obtain cash, would be sufficient to still panics without the need for making loans.
