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Lenders of Last Resort in a Globalized World

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  • Maurice Obstfeld

    (Professor, University of California, Berkeley (E-mail: obstfeld@econ.berkeley.edu))

Abstract

The recent financial crisis teaches important lessons regarding the lender-of-last resort function. Large swap lines extended in 2007-08 from the Federal Reserve to other central banks show that the classic concept of a national last-resort lender fails to address key vulnerabilities in a globalized financial system with multiple currencies. What system of emergency international financial support will best help to minimize the likelihood of future economic instability? Acting alongside national central banks, the International Monetary Fund has a key role to play in the constellation of lenders of last resort. As the income-level and institutional divergence between emerging and mature economies shrinks over time, the IMF may even evolve into a global last- resort lender that channels central bank liquidity where it is needed. The IMF's effectiveness would be greatly enhanced by several complementary reforms in international financial governance, though some of these appear politically problematic at the present time.

Suggested Citation

  • Maurice Obstfeld, 2009. "Lenders of Last Resort in a Globalized World," IMES Discussion Paper Series 09-E-18, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:09-e-18
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    References listed on IDEAS

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    Cited by:

    1. Obstfeld, Maurice, 2010. "The immoderate world economy," Journal of International Money and Finance, Elsevier, vol. 29(4), pages 603-614, June.
    2. Eduardo Fernandez-Arias, 2010. "Multilateral Safety Nets for Financial Crises," Research Department Publications 4668, Inter-American Development Bank, Research Department.
    3. Hiroshi Fujiki, 2013. "Policy Measures to Alleviate Foreign Currency Liquidity Shortages under Aggregate Risk with Moral Hazard," The Japanese Economic Review, Japanese Economic Association, vol. 64(4), pages 504-536, December.
    4. Maurice Obstfeld, 2010. "Expanding gross asset positions and the international monetary system," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 463-478.
    5. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2010. "Financial Stability, the Trilemma, and International Reserves," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 57-94, April.
    6. Schoenmaker, Dirk & Siegmann, Arjen, 2014. "Can European bank bailouts work?," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 334-349.
    7. James Pinnington & Maral Shamloo, 2016. "Limits to Arbitrage and Deviations from Covered Interest Rate Parity," Discussion Papers 16-4, Bank of Canada.
    8. Mohamed Z. M. Aazim & Nawalage S. Cooray, 2010. "Monetary Policy and Yield Curve Dynamics in an Emerging Market: Sri Lankan Perspectives," Working Papers EMS_2010_11, Research Institute, International University of Japan.

    More about this item

    Keywords

    Lender of Last Resort; Financial Crisis; Central Banking; International Monetary System; International Monetary Fund;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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