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Independent central banks and banking crisis liquidity

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  • Michael A. Gavin

    (The University of Toronto)

Abstract

This study develops and tests a formal model that shows why central banks protected from direct government borrowing supply a larger financial safety net for commercial banks during a crisis. This result is derived from a novel model of central bank independence grounded in the rules governing access to the central bank’s balance sheet, rather than in the politics of inflation. Subsequent analysis shows that this result is mediated by the degree of leverage in the banking system, but only in democracies where government borrowing restrictions are credible. Supporting quantitative evidence comes from an event study on a large sample of emerging market banking crises between 1980-2009.

Suggested Citation

  • Michael A. Gavin, 2020. "Independent central banks and banking crisis liquidity," The Review of International Organizations, Springer, vol. 15(1), pages 109-131, January.
  • Handle: RePEc:spr:revint:v:15:y:2020:i:1:d:10.1007_s11558-018-9324-5
    DOI: 10.1007/s11558-018-9324-5
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    More about this item

    Keywords

    Central bank independence; Political economy; Banking crises; Financial safety nets; Game theory; Event study;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • 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

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