The Lender of Last Resort: Liquidity Provision or Bail-Out?
The article compares two ways to help struggling financial institutions: providing them with emergency funds (liquidity provision) or bailing them out. The researchers found that providing liquidity can prevent a crisis from spreading, but it may also encourage risky behavior. On the other hand, bailing out institutions can be costly for taxpayers and create moral hazard. The study suggests that a balance between these two approaches is crucial for maintaining financial stability.