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Central Bank Involvement in Banking Crises in Latin America

  • Luis Ignacio Jácome

This paper reviews the nature of central bank involvement in 26 episodes of financial disturbance and crises in Latin America from the mid-1990s onwards. It finds that, except in a handful of cases, large amounts of central bank money were used to cope with large and small crises alike. Pouring central bank money into the financial system generally derailed monetary policy, fueled further macroeconomic unrest, and contributed to simultaneous currency crises, thereby aggravating financial instability. In contrast, when central bank money issuance was restricted and bank resolution was timely executed, financial disturbances were handled with less economic cost. However, this strategy worked provided appropriate institutional arrangements were in place, which highlights the importance of building a suitable framework for preventing and managing banking crises.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/135.

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Length: 49
Date of creation: 01 May 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/135
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  1. Barry Eichengreen and Carlos Arteta., 2000. "Banking Crises in Emerging Markets: Presumptions and Evidence," Center for International and Development Economics Research (CIDER) Working Papers C00-115, University of California at Berkeley.
  2. Reinhart, Carmen & Goldstein, Morris & Kaminsky, Graciela, 2000. "Assessing financial vulnerability, an early warning system for emerging markets: Introduction," MPRA Paper 13629, University Library of Munich, Germany.
  3. De La Torre,Augusto, 2000. "Resolving bank failures in Argentina - recent developments and issues," Policy Research Working Paper Series 2295, The World Bank.
  4. Peter Stella, 2008. "Central Bank Financial Strength, Policy Constraints and Inflation," IMF Working Papers 08/49, International Monetary Fund.
  5. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  6. Martinez Peria, Maria Soledad, 2000. "The impact of banking crises on money demand and price stability," Policy Research Working Paper Series 2305, The World Bank.
  7. Demirguc-Kunt, Asli & Karacaovali, Baybars & Laeven, Luc, 2005. "Deposit insurance around the world : a comprehensive database," Policy Research Working Paper Series 3628, The World Bank.
  8. Carlos O. Arteta, 2003. "Are financially dollarized countries more prone to costly crises?," International Finance Discussion Papers 763, Board of Governors of the Federal Reserve System (U.S.).
  9. Francisco F. Vázquez & Carmen Reinhart & Marco Arena, 2007. "The Lending Channel in Emerging Economies: Are Foreign Banks Different?," IMF Working Papers 07/48, International Monetary Fund.
  10. Agustin Carstens & Luis I. Jacome H., 2005. "Latin American Central Bank Reform: Progress and Challenges," Macroeconomics 0509022, EconWPA.
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