Discount Window Stigma: An Experime ntal Investigation
Abstract:
A core function of central banks is to act as a “lender of last resort”
to the banking system. In the U.S., the Federal Reserve uses the Discount
Window (DW) to fulfill this task. Historically, however, the DW has been li
ttle used, even when banks faced acute liquidity shortages. This lack of DW
borrowing is commonly attributed to stigma, as illustrated by Chairman Ber
nanke’s quote above. The economic consequences of DW stigma may be severe f
or the financial system (e.g. fire-sales, excessive self-insurance, failure
s). Further, DW stigma may prevent central banks from effectively providing
emergency liquidity and implementing monetary policy. Despite its relevanc
e, DW stigma is not a well-understood phenomenon, in large part because of
the lack of data. In this paper, we use lab experiments to generate data in
order to better understand DW stigma and how to eliminate it. To the best
of our knowledge, this is the first paper that relies on experimental metho
ds to address DW stigma and more generally the provision of emergency liqui
dity by central banks.