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Macroeconomic Stabilisation and Emergency Liquidity Assistance

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  • Marcelo Sánchez

Abstract

We introduce imperfect monetary policy transparency and strategic wage setting into a macro model where the central bank provides lender of last resort (LOLR) services to banks on top of its standard stabilisation policy. We study how, in the presence of adverse exogenous financial developments, macroeconomic and financial instability can be dampened by adjustments in policy institutions and economic structure. In a context of costly LOLR transactions and no moral hazard, the central bank has an incentive to save only large banks. Central bank opaqueness can help improve macroeconomic and financial stability by making wages closer to their competitive levels. Some results depend on initial conditions concerning monetary institutions; for instance, monetary strictness and wage bargaining centralisation help discipline wages and thus are stability-enhancing when central bank policies are initially seen as rather strict and transparent. Some consideration is given to the roles of trade openness and moral hazard behaviour on the part of banks.

Suggested Citation

  • Marcelo Sánchez, 2014. "Macroeconomic Stabilisation and Emergency Liquidity Assistance," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 32(73), pages 5-16, July.
    • Handle: RePEc:bdr:ensayo:v:32:y:2014:i:73:p:5-16
    DOI: 10.1016/S0120-4483(14)70016-8
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    Keywords

    Macroeconomic stabilization; lender of last resort; Banking crises; Monetary accommodation; Central bank transparency; Wage bargaining;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects

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