Working Paper: CEPR ID: DP2842
Authors: Olivier Jeanne; Charles Wyplosz
Abstract: This Paper considers how an international lender of last resort can prevent self-fulfilling banking and currency crises in emerging economies. We compare two different arrangements: one in which the international lender of last resort injects international liquidity into financial markets, and one in which its resources are used to back domestic banking safety nets. We argue that these arrangements have very different institutional implications: the first one implies an international lender of last resort with unlimited resources (a global central bank), while the second one could be operated by a limited ?international banking fund?. This fund, however, would have to be closely involved in the supervision of domestic banking systems. Both arrangements would require important changes in the global financial architecture.
Keywords: Asian Crisis; Bank Runs; Credit Crunch; Deposit Insurance; Dollarization; Exchange Rate Regime; International Monetary Fund; Lender of Last Resort; Multiple Equilibria
JEL Codes: F32; F33; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| size of the international LOLR (F33) | risk of self-fulfilling crises (H12) |
| resource allocation of the LOLR (E58) | stability of the banking system (G21) |
| misuse of LOLR's resources (E44) | agency problems (G34) |
| involvement of international LOLR in domestic banking supervision (E58) | effective use of resources (D61) |