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The Hidden Costs of Central Bank Borrowing

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Date
2012-04-16
Author
Hunt, Shane
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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 thesis
Department
Economics
Subject
Banking
Central Banking
Finance
Permalink
https://hdl.handle.net/10161/5131
Citation
Hunt, Shane (2012). The Hidden Costs of Central Bank Borrowing. Honors thesis, Duke University. Retrieved from https://hdl.handle.net/10161/5131.
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This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 United States License.

Rights for Collection: Undergraduate Honors Theses and Student papers


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