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The Single Period Model
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a3ht assume bank failures Bank of England bank requiring LOLR bank seeking banking system bij)It call for LOLR CB will respond CB's incentive CB's optimal central bank commercial bank Comparative statics contagion and moral cost of LOLR costs of rescue critically depend depends on bank dynamic programming dynamic setting equation of motion equilibrium risk level Error Bands et+1 failing banks H/M ratio ht and pt ht+i illiquid incentive to provide incentive to rescue interconnectedness Lagrange function large banks LOLR action LOLR assistance LOLR being insolvent Long-Term Capital Management loss function main concern market failure moral hazard objective function open market operations optimal policy optimally rescue order conditions panic period model problem provide LOLR Pt+i quadratic real number roots rescue banks rescue these banks rescuing policy respond to banks risk profile Section seeking LOLR single period setting solvency stability conditions system risk threshold time-varying variable whereby