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Lenders of Last Resort in a Globalized World

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Author Info
Maurice Obstfeld (Professor, University of California, Berkeley (E-mail: obstfeld@econ.berkeley.edu))

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Abstract

The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last- resort lender that channels central bank liquidity where it is needed. The IMF's effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time.

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Publisher Info
Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 09-E-18.

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Date of creation: Aug 2009
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Handle: RePEc:ime:imedps:09-e-18

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Related research
Keywords: Lender of Last Resort; Financial Crisis; Central Banking; International Monetary System; International Monetary Fund;

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Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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References listed on IDEAS
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  1. Naohiko Baba & Robert N McCauley & Srichander Ramaswamy, 2009. "US dollar money market funds and non-US banks," BIS Quarterly Review, Bank for International Settlements, March. [Downloadable!]
  2. John B. Taylor & John C. Williams, 2009. "A Black Swan in the Money Market," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 58-83, January. [Downloadable!]
    Other versions:
  3. Charles Goodhart & Dirk Schoenmaker, 2009. "Fiscal Burden Sharing in Cross-Border Banking Crises," International Journal of Central Banking, International Journal of Central Banking, vol. 5(1), pages 141-165, March. [Downloadable!]
  4. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall. [Downloadable!] (restricted)
  5. Graciela Laura Kaminsky & Sergio L. Schmukler, 2008. "Short-Run Pain, Long-Run Gain: Financial Liberalization and Stock Market Cycles," Review of Finance, Oxford University Press for European Finance Association, vol. 12(2), pages 253-292. [Downloadable!] (restricted)
  6. Naohiko Baba & Frank Packer & Teppei Nagano, 2008. "The spillover of money market turbulence to FX swap and cross-currency swap markets," BIS Quarterly Review, Bank for International Settlements, March. [Downloadable!]
  7. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March. [Downloadable!]
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