Be that as it may, we now know that two attributes of financial instability are: (i) excessive volatility of macro variables such as interest rates and exchange rates which have a direct impact on the real economy; and (ii) financial institutions and markets threatened by illiquidity to the extent of jeopardizing systemic stability. 28.
One clear instrument available to central banks for preserving financial stability is the lender of last resort or LOLR function. Over the years we have come to believe that LOLR is a fairly robust instrument for combating threats of illiquidity.