Universität Bayreuth

Necessity of central banks and its institutional foundations Historical experiences show that a financial crisis in the banking system may cause panic reactions leading to bank failures and business bankruptcies. Central banks as lenders of last resort can help to prevent and contain financial disruptions. Perceiving this role two conditions must be fulfilled, a technical and an institutional one. Technically the banks must be tied to the central bank. Institutionally the central bank needs political autonomy in pursuing exclusively assigned objectives, especially price stability. In the paper it will be shown that the institutional prerequisites of the ECB are superior to those of the Fed. JEL-Classification: E 42, E 52, E 58