Can Discount Window Stigma Be Cured? An Experimental Investigation

Abstract

A core responsibility of the Federal Reserve is to ensure financial stability by acting as the lender of last resort through its Discount Window (DW). The DW, however, has not been effective because its usage is stigmatized. In this paper, we use theory and experiments to study how such stigma can be cured. We find that behavioral inertia makes it difficult to fix a stigmatized DW, but adding a new backstop facility can help mitigate stigma. These results are consistent with the Federal Reserve’s experience. (JELE58, G01, C92)