This paper examines the monetary policy followed during the current financial crisis from the perspective of the theory of the lender of last resort. It is argued that standard monetary policy measures would have failed because the channels through which monetary policy is implemented depend...

A major lesson of the recent financial crisis is that the ability of banks to withstand liquidity shocks and to provide lending to one another is crucial for financial stability. This paper studies the functioning of the interbank lending market and the optimal policy of a central bank in...