Money under the mattress: Inflation and lending of last resort

Gadi Barlevy, Daniel Bird, Daniel Fershtman, David Weiss*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


This paper examines whether the two key functions of central banks—ensuring price stability and lending during crises—necessarily conflict. We develop a nominal model of bank runs à la Diamond and Dybvig (1983) in which individuals can store the money they withdraw “under the mattress.” In this setting, lending of last resort need not be inflationary. Whether it is depends on the interest rates the central bank charges on its loans. Our results suggest that the central bank must not charge a rate that is too low if it wants to ensure price stability, and must charge a high rate if it wants to robustly attain the ex-ante efficient outcome. These rationales for charging high interest rates on loans during a crisis are distinct from the arguments Bagehot originally relied on to advocate for a similar rule.

Original languageEnglish
Article number105804
JournalJournal of Economic Theory
StatePublished - Apr 2024


FundersFunder number
Sapir Center for Economic Development


    • Bagehot rule
    • Bank runs
    • Financial stability
    • Price-level stability


    Dive into the research topics of 'Money under the mattress: Inflation and lending of last resort'. Together they form a unique fingerprint.

    Cite this