The discount window and credit availability

This paper models the impact of the discount window on decisions of individ ual banks facing regulatory capital requirements and stochastic deposit sup ply. A central result is that banks may choose a larger lending capacity if the discount window is available than if it is not. Moreover, if the cost of capital is higher during recessions, banks may then avoid the window, co ntributing to the downturn. A discontinuous interaction emerges between ris k-based capital requirements and use of the discount window, with a more st ringent capital requirement inducing some banks to hold less capital. (C) 1 999 Elsevier Science B.V. All rights reserved. JEL classification: G21; G28 .