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A Simple Model of an International Lender of Last Resort

Listed author(s):
  • Haizhou Huang
  • Charles Goodhart

    ()

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.

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File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmg_pdfs/dp336.pdf
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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp336.

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Date of creation: Sep 1999
Handle: RePEc:fmg:fmgdps:dp336
Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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  1. 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.
  2. Morris, Stephen & Shin, Hyun Song, 2004. "Coordination risk and the price of debt," European Economic Review, Elsevier, vol. 48(1), pages 133-153, February.
  3. Douglas W. Diamond & Raghuram G. Rajan, 1999. "Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking," NBER Working Papers 7430, National Bureau of Economic Research, Inc.
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