Bulletin of Monetary Economics and Banking

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The role of central bank as the lender of last resort (LOLR) has been well known since 19th century. LOLR is a lending facility to non liquid bank to avoid systemic financial crisis on banking. In Indonesia Central Bank of Indonesia provides this facility, namely Bantuan Likuiditas Bank Indonesia (BLBI). Using macro-econometric model to run two simulations; with and without BLBI, we find that BLBI can avoid national output fall while the existence of BLBI, the cost of liquidity crisis will be less. Our result also shows that BLBI tend to overshoot exchange rate by money printing to support non liquid bank which in turn increase the probability of systemic crisis.

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