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Dual liquidity crises under alternative monetary frameworks: a financial accounts perspective

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  • Bindseil, Ulrich
  • Winkler, Adalbert

Abstract

This paper contributes to the literature on liquidity crises and central banks acting as lenders of last resort by capturing the mechanics of dual liquidity crises, i.e. funding crises which encompass both the private and the public sector, within a closed system of financial accounts. We analyze how the elasticity of liquidity provision by a central bank depends on the international monetary regime in which the relevant country operates and on specific central bank policies like collateral policies, monetary financing prohibitions and quantitative borrowing limits imposed on banks. Thus, it provides a firm basis for a comparative analysis of the ability of central banks to absorb shocks. Our main results are as follows: (1) A central bank that operates under a paper standard with a flexible exchange rate and without a monetary financing prohibition and other limits of borrowings placed on the banking sector is most flexible in containing a dual liquidity crisis. (2) Within any international monetary system characterized by some sort of a fixed exchange rate, including the gold standard, the availability of inter-central bank credit determines the elasticity of a crisis country’s central bank in providing liquidity to banks and financial markets. (3) A central bank of a euro area type monetary union has a similar capacity in managing dual liquidity crises as a country central bank operating under a paper standard with a flexible exchange rate as long as the integrity of the monetary union is beyond any doubt. JEL Classification: E50, E58

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 1478.

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Date of creation: Oct 2012
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Handle: RePEc:ecb:ecbwps:20121478

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Keywords: bank run; central bank co-operation; Gold Standard; liquidity crisis; sovereign debt crisis;

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Cited by:
  1. Ulrich Bindseil & Adalbert Winkler, 2013. "Dual Liquidity Crises—A Financial Accounts Framework," Review of International Economics, Wiley Blackwell, vol. 21(1), pages 151-163, 02.
  2. Philippine Cour-Thimann, 2013. "CESifo Forum Special Issue April 2013: Target Balances and the Crisis in the Euro Area," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 0, pages 05-50, 05.
  3. Winkler, Adalbert, 2013. "Der lender of last resort vor Gericht," Frankfurt School - Working Paper Series 206, Frankfurt School of Finance and Management.
  4. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden stops in the euro area," Policy Contributions 718, Bruegel.
  5. Cour-Thimann, Philippine & Winkler, Bernhard, 2013. "The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure," Working Paper Series 1528, European Central Bank.
  6. Barry Eichengreen & Arnaud J. Mehl & Livia Chițu & Gary Richardson, 2014. "Mutual Assistance between Federal Reserve Banks, 1913-1960 as Prolegomena to the TARGET2 Debate," NBER Working Papers 20267, National Bureau of Economic Research, Inc.
  7. Stephen Cecchetti & Robert McCauley & Patrick McGuire, 2012. "Interpreting TARGET2 balances," BIS Working Papers 393, Bank for International Settlements.

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