The federal reserve: Lender of last resort Gillian Garcia and Elizabeth Plautz Ballinger: Cambridge, MA, 1988, 310 pp.
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Garcia and Plautz have provided a real service to the profession by illuminating the important issues concerning the Federal Reserve System as lender of last resort. At one point in the book [p. 97] the authors refer to the preference by most economists to discuss the LLR concept via “...a practical, intuitive, rather than a theoretical, approach” that is in contrast to use of a “...formal theory of liquidity assistance...based on a mathematical framework, which is often the preferred approach among academic economists.” They imply here that the former is to be preferred to the latter, given the complexity of the LLR concept and the related public policy issues.
After reading the book, this reviewer reaches the opposite conclusion. There are so many interrelated issues associated with the conduct of LLR policy that what is needed are more concrete analyses of the problem by academic and non-academic economists. Formal theories, such as those provided by Kanatas  and by Waller , are sorely needed as policymakers continue to search for the appropriate LLR Policy structure. Garcia and Plautz have taken the practical, intuitive approach just about as far as it can go. Hopefully, their work will stimulate new attempts to provide theoretical guidance toward a welfare-maximizing LLR policy.
KeywordsInternational Economic Public Finance Formal Theory Policy Issue Federal Reserve
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