The Provision of Central Bank Liquidity under Asymmetric Information

entral banks provide liquidity in various contexts to promote the stability and efficient functioning of the financial system. While the exact institutional aspects of liquidity provision vary among central banks, some basic features seem to be generic. First, the provision of central bank liquidity in normal periods is restricted to a small subset of possible agents who are encouraged to compete for liquidity with each other instead of automatically receiving liquidity from the central bank. Second, in extraordinary cases, the central bank has the option of providing liquidity to a much broader range of agents, and this liquidity can be provided independent of financial market conditions.