On the Consequences of Having a Central Bank with an Open Market-Policy Transmission Mechanism when a Financial Crisis hits. The case of the Federal Reserve and a Minskian Call for a Return to the Discount Window as the Primary Tool of Monetary Policy

This thesis analyzes the case of the Federal Reserve and highlights the negative consequences of having a Central Bank that normally prefers the open market rather than the discount window as the primary tool for the provisions of legal reserves to member financial institutions when usual private short-term credit markets get frozen. The two main negative consequences identified are from both a financial-economic efficiency point of view of the Central Bank’s lender of last resort primary responsibilities, and from a juridical-legal point of view with respect to the interpretative problems concerning the emergency liquidity Section 13(3) of the Federal Reserve Act. In light of such consequences, and adopting a Minskian perspective regarding the specific field of central banking and monetary policy, the thesis calls for a return to a Federal Reserve relying on the discount window, instead of open-market operations in its customer relationships with member financial institutions.