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A Simple Model of an International Lender of Last Resort

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  • Haizhou Huang
  • Charles Goodhart

    ()

Abstract

This paper develops a simple model of an international lender of last resort (ILOLR). The World economy consists of many open economies, each with its own banking system and its own central bank which uses its reserves to manage a pegged exchange rate. The fragility of the banking system and the limited ability of a domestic cent-rate. The fragility of the banking system and the limited ability of a domestic central bank to provide international liquidity together can cause currency and banking crises.. An international interbank market can help an economy with the needed international liquidity, but this risk-sharing also comes with potential costs of international financial contagion. Such international contagious risk is much higher when there is an international interbank market than otherwise. An ILOLR can play a useful role in providing international liquidity and reducing international contagion.

Suggested Citation

  • Haizhou Huang & Charles Goodhart, 1999. "A Simple Model of an International Lender of Last Resort," FMG Discussion Papers dp336, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp336
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    1. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    3. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
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