The European Central Bank as Lender of Last Resort in the Government Bond Markets

The sovereign debt crisis has made it clear that central banking is more than keeping inflation low. Central banks are also responsible for financial stability. An essential tool in maintaining financial stability is provided by the capacity of the central bank to be the lender of last resort in the...

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Bibliographic Details
Published in:CESifo economic studies 2013-09, Vol.59 (3), p.520-535
Main Author: De Grauwe, P.
Format: Article
Language:English
Subjects:
Banking
Banking system
Bond market
Bond markets
Central banks
Economic crisis
Economic stability
Economic stabilization
Economic theory
Europe
Government bonds
Monetary unions
Sovereign debt
Western Europe
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Summary:The sovereign debt crisis has made it clear that central banking is more than keeping inflation low. Central banks are also responsible for financial stability. An essential tool in maintaining financial stability is provided by the capacity of the central bank to be the lender of last resort in the banking system. In this article, I argue that the ECB should also be the lender of last resort in the government bond markets of the monetary union, very much like the central banks in countries that issue debt in their own currencies are. This is necessary to prevent countries from being pushed into bad equilibria by self-fulfilling fears of liquidity crises in a monetary union. The ECB decided to take on this role in 2012. I evaluate this decision and I discuss the different arguments formulated by those who oppose this new role of the ECB. [PUB ABSTRACT]
ISSN:1610-241X
1612-7501
DOI:10.1093/cesifo/ift012