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Is the discount window necessary? : a Penn-Central perspective

Author: Charles W Calomiris; National Bureau of Economic Research.
Publisher: Cambridge, MA. : National Bureau of Economic Research, [1993]
Series: Working paper series (National Bureau of Economic Research), working paper no. 4573.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
Abstract: The discount window has been under attack recently as a costly and unnecessary tool of policy. This paper argues that the primary role of the discount window should be to provide occasional, temporary support to particular financial markets during localized financial crises. The benefits of the discount window revolve around information externalities across firms resulting from confusion over the incidence  Read more...
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Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Charles W Calomiris; National Bureau of Economic Research.
OCLC Number: 70045625
Notes: "December 1993."
Description: 1 online resource (37, [9]) : illustrations.
Series Title: Working paper series (National Bureau of Economic Research), working paper no. 4573.
Responsibility: Charles W. Calomiris.

Abstract:

Abstract: The discount window has been under attack recently as a costly and unnecessary tool of policy. This paper argues that the primary role of the discount window should be to provide occasional, temporary support to particular financial markets during localized financial crises. The benefits of the discount window revolve around information externalities across firms resulting from confusion over the incidence of bad news, or reductions in the net worth of market intermediaries. The history of the Penn Central commercial paper crisis of 1970, and the Fed's use of the discount window to combat that crisis, are reviewed. The crisis is visible in a pronounced decline in outstanding commercial paper, an increase in the interest rate spreads for commercial paper and for long-term debt, and declines in stock prices. Cross-sectional variation in abnormal stock returns indicates that, controlling for other factors, firms that were likely to have had outstanding debt in the form of commercial paper suffered larger negative returns during the onset of the crisis, and larger positive returns after the Fed intervened to lower the cost of commercial paper rollover. Implications of the 1970 crisis for current financial markets, and for discount window policy, are considered in light of this evidence.

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