Emergency Liquidity Injections

This paper compares the effectiveness of different forms emergency liquidity injections, including secured lending (repo), unsecured and securities purchases. The model features an endogenous banking crisis, funding market interactions, fire sale externalities. Injection policies are compared by their effects on ex ante incentives post outcomes. demonstrates that to banks via repo can curb selling relatively illiquid accepted as collateral, due binding collateral constraints. mitigated price depression, relative policy, counteracts reduces banks' losses without incentivising more risk-taking. Under or authority charge 'penalty rates' deter risk-taking, but be credible, should long term so repayments after conditions improve. Otherwise, cause further distress, compromising policy objectives. Liquidity injections purchases cannot credibly penalising, because does not require commit future income.