Liquidity Crises and the Market-Maker of Last Resort

Wed, 01 Jan 2025 00:00:00 +0000

This paper develops a theoretical model to explain why financial markets can suffer self-fulfilling liquidity crises and how a central bank acting as a “market-maker of last resort” (MMLR) can mitigate them. The motivation is policy-driven: during the 2008-09 crisis and the COVID-19 pandemic, the Fed, ECB, and other central banks purchased assets at above-market prices (e.g., Maiden Lane I/II/III and the TALF) to support markets, a function distinct from the traditional lender-of-last-resort (LLR) role. The authors note that formal theoretical analysis of MMLR remains sparse (citing Buiter et al. 2023) and aim to fill that gap.

Charles M. Kahn | Macro Paper Warehouse

Liquidity Crises and the Market-Maker of Last Resort