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

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Listed author(s):
  • 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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Paper provided by European Central Bank in its series Working Paper Series with number 1478.

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Date of creation: Oct 2012
Handle: RePEc:ecb:ecbwps:20121478
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Keywords: bank run; central bank co-operation; gold standard; liquidity crisis; sovereign debt crisis;

Find related papers by JEL classification:

  • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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Cited by:

  1. Eichengreen, Barry & Mehl, Arnaud & Chitu, Livia & Richardson, Gary, 2015. "Mutual Assistance between Federal Reserve Banks: 1913–1960 as Prolegomena to the TARGET2 Debate," The Journal of Economic History, Cambridge University Press, vol. 75(03), pages 621-659, September.
  2. Winkler, Adalbert, 2013. "Der lender of last resort vor Gericht," Frankfurt School - Working Paper Series 206, Frankfurt School of Finance and Management.
  3. Stephen Cecchetti & Robert McCauley & Patrick McGuire, 2012. "Interpreting TARGET2 balances," BIS Working Papers 393, Bank for International Settlements.
  4. Philippine Cour-Thimann, 2013. "CESifo Forum Special Issue April 2013: Target Balances and the Crisis in the Euro Area," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 0, pages 05-50, 05.
  5. Buiter, Willem H. & Rahbari, Ebrahim, 2012. "Target2 Redux: The simple accountancy and slightly more complex economics of Bundesbank loss exposure through the Eurosystem," CEPR Discussion Papers 9211, C.E.P.R. Discussion Papers.
  6. Silvia Merler & Jean Pisani-Ferry, 2012. "Sudden Stops in the Euro Area," Review of Economics and Institutions, Università di Perugia, vol. 3(3).
  7. Ulrich Bindseil & Philipp J. König, 2013. "Basil J. Moore's Horizontalists and Verticalists: an appraisal 25 years later," Review of Keynesian Economics, Edward Elgar Publishing, vol. 1(4), pages 383—390-3, October.
  8. 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.
  9. Mirdala, Rajmund, 2015. "Decomposing Euro Area Sovereign Debt Yields into Inflation Expectations and Expected Real Interest Rates," MPRA Paper 68866, University Library of Munich, Germany, revised Nov 2015.
  10. Gabriel Fagan & Paul McNelis, 2014. "TARGET Balances and Macroeconomic Adjustment to Sudden Stops in the Euro Area," The Institute for International Integration Studies Discussion Paper Series iiisdp465, IIIS, revised Dec 2014.
  11. Philippine Cour-Thimann & Bernhard Winkler, 2012. "The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure," Oxford Review of Economic Policy, Oxford University Press, vol. 28(4), pages 765-803, WINTER.
  12. J. Boeckx, 2012. "What is the role played by the Eurosystem during the financial crisis ?," Economic Review, National Bank of Belgium, issue ii, pages 7-28, September.

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