Fighting Crises with Secrecy
By: Gorton, Gary and Ordonez, Guillermo
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Material type: 
BookPublisher: American Economic Journal Macroeconomics Description: 12(4), Oct, 2020: p.218-245.Subject(s): Banks; Depository Institutions; Micro Finance Institutions; Mortgages
In:
American Economic Journal MacroeconomicsSummary: How does central bank lending during a crisis restore confidence? Emergency lending facilities that are opaque (in that names of borrowers are kept secret) raise the perceived average quality of bank assets in the economy, creating an information externality that prevents runs. Stigma (the cost of a bank's participation at the lending facility becoming public) is desirable to implement opacity as an equilibrium outcome, as no bank wants to reveal its participation status. The central bank's key policy instrument for limiting the use of lending facilities while maintaining secrecy is the haircut applied to bank assets used as collateral. – Reproduced
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Articles
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Indian Institute of Public Administration | 12(4), Oct, 2020: p.218-245 | Available | AR124539 |
How does central bank lending during a crisis restore confidence? Emergency lending facilities that are opaque (in that names of borrowers are kept secret) raise the perceived average quality of bank assets in the economy, creating an information externality that prevents runs. Stigma (the cost of a bank's participation at the lending facility becoming public) is desirable to implement opacity as an equilibrium outcome, as no bank wants to reveal its participation status. The central bank's key policy instrument for limiting the use of lending facilities while maintaining secrecy is the haircut applied to bank assets used as collateral. – Reproduced
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