The Hidden Costs of Central Bank Borrowing
Abstract
This paper explores a previously overlooked unintended consequence of a private bank
accepting Central Bank loans as a lender of last resort. Applying the basic Markowitz
Security Model, I explore the potential effect of a private bank accepting a Central
Bank loan as a signal of increased risk of investment in that private bank to the
private markets. Finding a possibility that private investors will charge a penalty
risk premium for having sought Central Bank financing, I consider the effects of this
premium in three different game theoretic scenarios, each with a different set of
assumptions that could apply in different Economic settings. Depending on the specific
environment, possible effects include dependence on Central Bank financing, bankruptcy,
or an eventual return to the private financial markets for future funding.
Type
Honors thesisDepartment
EconomicsPermalink
https://hdl.handle.net/10161/5131Citation
Hunt, Shane (2012). The Hidden Costs of Central Bank Borrowing. Honors thesis, Duke University. Retrieved from https://hdl.handle.net/10161/5131.Collections
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