A Handbook of Alternative Monetary Economics
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A Handbook of Alternative Monetary Economics

Edited by Philip Arestis and Malcolm Sawyer

This major Handbook consists of 29 contributions that explore the full range of exciting and interesting work on money and finance currently taking place within heterodox economics. There are many themes and facets of alternative monetary and financial economics but two major ones can be identified.
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Chapter 16: Central Bank and Lender of Last Resort

Michael Knittel, Sybille Sobczak and Peter Spahn


Michael Knittel, Sybille Sobczak and Peter Spahn Introduction The lender of last resort (LLR) is an agent or institution who is active, or is called on for help, in the credit market; but the main reason for its prominent status in the history of banking and monetary policy is that its activities are closely intertwined with the preservation of the use and function of money. The emergence of money from the banking business linked the microeconomic question of preventing a (banking) firm’s bankruptcy with the macroeconomic topic of the stability of the monetary order. Opinions and norms that have been elaborated to guide the proper execution of LLR tasks reflect institutional peculiarities of historical stages in the field of (central) banking. Therefore, ‘classical’ theories of the LLR have to be studied in order to understand why these findings cannot safely be taken as a cornerstone of a modern approach of the LLR problem. Designing such an approach is further complicated by the fact that in recent years LLR help was also demanded by, and given to, non-bank financial firms and even to countries which suffered from financial stress or debt overload.1 In all these cases, the crucial question is how to reconcile two basic economic goals: warding off economywide large losses of wealth, production and employment, which might accrue from the downfall of a single, albeit large market agent; and preserving the credibility of the ‘constitutional’ law of the market system – economic losses should be borne individually – which...

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