Lender of last resort: A contemporary perspective

This article re-examines the role of the central bank's lender of last resort (LLR) function in the current economic environment. It argues that the traditional role of protecting the money supply from collapse is no longer valid. LLR intervention is appropriate to offset temporary liquidity strains that are likely to depress asset prices and aggregate real income below their equilibrium levels. However, such support should be provided only rarely and through open market operations rather than the discount window.This article was started while the author was visiting the Federal Reserve Bank of Dallas. The article was improved by constructive suggestions received from Douglas Evanoff, Gillian Garcia, Robert Laurent, Gerald O'Driscoll, Anna Schwartz, and an anonymous referee.