Illiquid Banks, Financial Stability, and Interest Rate Policy

Douglas W. Diamond, Raghuram Rajan

NBER Working Paper No. 16994
Issued in April 2011

---- Acknowledgements -----

We thank the National Science Foundation and the Center for Research on Securities Prices at Chicago Booth for research support. Rajan also thanks the Initiative on Global Markets at Chicago Booth for research support. We benefited from comments from Guido Lorenzoni, Monika Piazzesi, Tano Santos, José Scheinkman, the referees, and seminar participants at the Harvard University , Princeton University, Richmond Fed, Stanford University, the University of Chicago, the American Economic Association meetings at San Francisco in 2009, and the February 2009 Federal Reserve Bank New York conference on Central Bank Liquidity Tools. An earlier version of this paper was titled “Illiquidity and Interest Rate Policy.” The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

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